'Doom and gloom' over the pandemic's long-term effects might be overdone, says Capital Economics

• "Doom and gloom" about the long-term effects of COVID-19's economic slump may be overdone, according to Capital Economics.
• Compared to the 2008 financial crisis, there are fewer reasons to expect the pandemic will weigh down on economic growth in the long-term as gradual rebounds are already underway, the research group's chief economist said.
• Instead of focusing on output, economic legacy will be seen in other areas such as structural changes, de-globalization, and the role of state.
• Most economies will not return to pre-virus GDP levels for another two to three years, but China — driven by an investment-intensive stimulus — will lead the way.
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It isn't all "doom and gloom" when considering the pandemic's long-term effect on the economy, according to Capital Economics.

Pessimism over the economic slump triggered by COVID-19 might just be overdone, Neil Shearing, the research group's chief economist said in a webcast on Thursday.

Compared to the 2008 financial crisis, there are fewer reasons to expect the pandemic will weigh down growth in the long term, he said.

Instead, economic legacy will be found in the pushback against globalization, higher debt levels, a different way of working, and less emphasis on austerity on austerity in particular.

These factors have major implications for commodity markets, in which some industrial metal prices are above their pre-virus levels and still have further room to go.

States will be radically transformed with different sectoral makeup for some economies, and some will shrink permanently while others will grow and develop in their place, Shearing said.

He pointed out that most economies will not return to pre-virus GDP levels for another two to three years, but China — driven by an investment-intensive stimulus — will lead the way.

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Throughout the group's forecast horizon, central banks are expected to continue to keep interest rates at rock-bottom levels.

Gold prices will remain elevated in the medium-term, given that real yields, which strip out the effects of inflation, are likely to remain low.

Demand of industrial metals cratered earlier this year following virus-containment measures, and led to record-low price levels in March.

But prices have rebounded quickly, and all except aluminum and lead are now higher year-to-date, James O'Rourke, a commodity economist's report showed. Despite the year's rally, prices can be expected to rise a little more by end-2021, he wrote.

"For one, China's economy is on track to return to its pre-virus path by end-2020, far earlier than any other major economy," O'Rourke said. "The recent ramp-up in China's fiscal stimulus, with its focus on metals-intensive infrastructure spending, has room to run this year, while a further economic boost will come from faster credit growth."

The huge stimulus-led price rally after the great financial crisis came on the back of massive credit growth, on a scale which might not be repeated this time, the report said.

For oil, international benchmark Brent crude's recent drop to a two-month-low shows its fragile nature of price recovery. An uneven recovery in demand, and the effect of vast surplus oil inventories accumulated in the first half of the year will likely limit any price gains. Brent is unlikely to see much in the way of price gains over the remainder of the year. Capital Economics expects it trade around $45 a barrel by the close of the year, compared with around $43 now.

"Even as most sources of oil demand return to more 'normal' levels as economies recover, we suspect that jet fuel consumption will remain depressed as a result of ongoing travel restrictions and a fall in commercial passenger flights," O'Rourke said.

Demand is likely to run faster than supply, which will help run down some of the overhang of unused fuel in storage tanks, but not fast enough to trigger a large burst higher in the price.

"We think that the outlook for oil prices will brighten a little next year, as supply fails to keep pace with a continued revival in demand," he concluded.

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