Moderately higher inflation in response to bigger debt levels – UBS

The world will emerge from COVID with considerably higher levels of debt while will be left structurally less global by the crisis, spurring on the de-globalization trend, according to economists at UBS.

Key quotes

“We expect government debt as a percentage of GDP to be about 15-25 percentage points higher at the end of 2021 than it was at the end of 2019.” 

“Interest rates have little room to go lower, which limits the potential for high-quality bonds to provide significant positive returns in the event of an equity market downturn.”

“Central banks may be prepared to tolerate a rate of inflation somewhat above the 2% target rate for a year or two. Inflation between 2% and 5%, if not for too long, would likely not add to inflation uncertainty risk, and could help modestly reduce debt burdens.” 

“Governments are likely to view more goods as being strategically important, and so encourage more domestic production. Meanwhile, companies have become more aware of the operational risks posed by long global supply chains. Bringing production closer to the end market is likely to become a more common response.”