The Covid-19 Endgame: Learning to Live With it

  • As the world learns to live with the current health crisis, it’s bringing about structural changes
  • There are fundamental alterations in people’s behavior, public opinion and government approach
  • Forecasting has become more complicated, but certain macro themes are likely to play out in coming years

The world is entering a stage where Covid-19 is becoming endemic. Like structural changes following the Great Depression that began in the late 1920s and lasted for a decade, those after Covid-19 are likely to be no different. It is bringing about fundamental alterations in people’s behavior, company operations, public opinion and government approaches.

The endgame of Covid-19 leaves economists in a challenging position when making long-term forecasts. In many ways, the outlook is more complicated now than it was at the onset of the pandemic. Structural changes to long-established economic relationships are never easy to identify ahead of time, but we make an attempt to understand how some macro themes are likely to play out in coming years.

Greater inequality

Covid-19 has exacerbated income inequality due to differing recovery rates across segments of the world economy, be it better recoveries among developed markets versus emerging markets, or limited hits to larger firms versus smaller ones. Elevated uncertainty over the trajectory of the pandemic and uneven vaccine rollouts suggest these disproportionate impacts will linger. That could give rise to greater social unrest, unless governments focus more on income redistribution policies, such as taxes on capital gains, inheritance and housing, and universal basic income policies.

A low natural rate of interest

The combined effects of a further slowdown in global potential output growth and higher private-sector savings over investment is likely to reduce an already-low natural rate of interest. This means that the terminal policy rate in the current tightening cycle should be lower than in past cycles. With a lower natural rate of interest, central banks’ responses to future economic downturns will need to become more creative with greater use of unconventional monetary policies.

A higher natural rate of unemployment

Due to pandemic-driven frictions in labor markets, the natural rate of unemployment, or the unemployment rate over the long run in which inflation is stable, is expected to shift upward. These frictions could range from re-evaluations of work-life balance, which could result in families opting to have one parent out of the labor market to take care of childcare responsibilities, or even a shift in demand towards workers in technology-related sectors, which may not be immediately met because of time taken to train/re-skill.

An intensified effort to tackle global warming

There will be an intensified worldwide effort from countries, companies, financial authorities and investors to tackle global warming, for which a global minimum carbon tax will be key. It will not be a smooth path, as disagreements on equity between emerging and developed markets could be amplified by the imposition of a carbon border adjustment tax. Strong inflationary pressures in the transition to a greener planet could also pose a challenge.

Lower global potential GDP growth

A combination of secular stagnation in developed markets and a sizable drop in China’s potential GDP growth may have led to a decline in global potential GDP growth even without the pandemic. With Covid-19, we expect a further slowdown in potential output growth in emerging markets. The 3.4% average global GDP growth from 2000-2007, before the Global Financial Crisis, dropped to 2.8% from 2010-19, and we estimate it could slow further to 2.5% in 2022-30.

Inflation less transitory

Inflation has turned out to be less transitory than initially thought, but it could fall next year as supply constraints ease. That said, several countries might shift to a moderately higher inflation regime than before the pandemic due to factors including rising inflation expectations, housing booms, deglobalization, ‘greenflation’, and the increasing bargaining power of workers. Central banks, especially those in emerging markets, could face tough policy dilemmas around financial stability.

Evolving macro-policy responses

The pandemic compelled governments to respond to the rapid deterioration in economic conditions. This was especially true in an environment where many central banks faced less room to cut rates, given still-low neutral rates. Many fiscal authorities filled the void with additional policy support. Coming out of the pandemic, attention may shift away from coordinated monetary and fiscal action to whether fiscal policy should pivot from cyclical support to structural changes by combating inequality and climate change. Constraints including fiscal sustainability and elevated inflation may ultimately limit momentum for more active policy responses.


A unique feature of this pandemic has been the lack of bankruptcies that would typically accompany deep recessions. While failures are expected to rise during the post-pandemic normalization phase and as policymakers remove monetary and fiscal support, bankruptcies should remain benign. They are likely to be limited, sector-specific rather than economy-wide, and more related to structural shifts than cyclical factors.

More frequent EM crises

The unprecedented scale of policy easing by major central banks is the core reason for the lack of EM currency crises during Covid-19. EM currency crises have probably just been delayed. Lower vaccination rates among EMs, a more hawkish Fed, and hot money outflows are among a host of risks that could lead to more frequent EM crises in the coming years and greater investor discrimination.

New behaviors of households and firms

New behaviors brought about by the pandemic are likely to be permanent. For households, they include a shift to suburban living, greater use of tele-medicine, e-learning, online shopping, streaming services, and traveling more within the country. Firms too are likely to change their business models, including increased investment in technology and research & development, prioritizing staff safety and sustainability goals, and tapping more geographically dispersed customers.

Tourism destinations

Tourism flows are on a more consistent medium-term recovery trajectory. The recovery of capital flows through tourism suggests balance of payments positions in Thailand, Turkey, South Africa and New Zealand will benefit. Thailand will likely benefit most from a global re-opening and a normalization of travel, but the process will be gradual, as we expect China’s outward tourism to remain constrained into 2022.

For more detailed views on the above themes, read our full report.

This report was a global collaboration with contributions from Australia Rates Strategist Andrew Ticehurst, Chief Japan Economist Takashi Miwa, Chief Asia ex-Japan Economist Sonal Varma, Japan Economist and ESG Analyst Kohei Okazaki, Chief China Economist Ting Lu, Senior US Economist Aichi Amemiya, Senior US Economist Robert Dent, Chief European and UK Economist George Buckley, Chief ASEAN Economist Euben Paracuelles, and Chief Global Strategist Craig Chan.


    Rob Subbaraman

    Rob Subbaraman

    Head of Global Macro Research


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