What to expect in the post-COVID economy


Parallels between now and the post-WWII era suggest what could happen next.



The diagram above is a hypothetical illustration of the business cycle. There is not always a chronological, linear progression among the phases of the business cycle, and there have been cycles when the economy has skipped a phase or retraced an earlier one

Key takeaways

  • Most major economies are progressing toward the mid-cycle phase of expansion, with varying levels of activity based on vaccine rollout and reopening progress.

  • For the first time in decades, both fiscal and monetary policy will likely remain easy during an accelerating expansion—a significantly different backdrop from the low-growth, low-inflation period following the 2008 financial crisis.

  • The post-World War II shift to a peacetime economy, which catalyzed a cyclical rebound of nominal growth and inflation, may be the closest historical analog to the upcoming post-COVID era where vaccinations and reopening gain steam over the course of 2021 and 2022.

  • Similar to the late 1940s, nominal growth and inflation may receive a boost from households flush with pent-up demand and high savings, government policies to maintain low interest rates and high debt levels, and a repaired banking system poised to lend.

  • Rising nominal growth may remain a tailwind for cyclical assets, but the markets face several risks that could generate volatility over the next 12 to 18 months, including elevated valuations and uncertainty about inflation and the monetary outlook.

Global business cycle progressing


Key developed economies appear to be progressing toward the mid-cycle expansion phase as activity improves at the margin, and the rollout of COVID-19 vaccines broadens the prospects for full economic reopening. See the chart, Business cycle framework.

The global vaccination effort is resulting in the daily administration of millions of COVID-19 vaccine doses and a decline in virus cases. Though progress is likely to move in fits and starts, we expect a boost to global activity as nations increase the pace of inoculations, reduce virus-related social distancing measures, and move to reopen their economies.

  • We believe that Israel may be considered a bellwether for economic activity. Israel has led the vaccination campaign with more than 85% of its population having received at least one dose of a COVID-19 vaccine, compared with less than 25% in the United States.* Levels of mobility in Israel, a proxy for economic activity, have shown encouraging signs of improvement and are now higher than those in Europe. See the chart, Israel: Vaccines and mobility.

  • In Europe, the extension of strict social distancing measures may continue hindering service industry activity. However, key drivers of business-cycle momentum, such as business confidence and manufacturing, have been relatively resilient.

  • The rate of economic improvement in China may moderate as the expansion matures. Industrial production appears to be peaking, consumption and services activity continue to recover gradually, and monetary policymakers have shifted away from easing and toward addressing medium-term financial risks.

  • The US economy appears to be progressing toward the mid-cycle expansion phase, as activity continues to incrementally improve.