Macrofinancial information on the post-COVID-19 economic recovery: Will it be V, U or L-shaped?

We use standard macrofinancial no-arbitrage term structure models to forecast key macroeconomic variables such as GDP. Simple adaptations to the models are proposed in order to generate plausible forecasts in the context of the COVID-19 crisis. The financial market variables included in the models are shown to improve GDP forecasts. Forecasts of real GDP conditioned on macrofinancial information up to August 2020 suggest that the shape of the recovery will most likely be between a U and an L in most euro area countries considered, with substantial persistent losses.

Automated summary

By using standard macrofinancial no-arbitrage term structure models to forecast key macroeconomic variables such as GDP, simple adaptations have been proposed to generate plausible forecasts during the COVID-19 crisis. It has been shown that financial market variables included in the models can improve GDP forecasts, with real GDP forecasts up to August 2020 suggesting that the shape of recovery in most euro area countries will likely be between a U and an L, with substantial persistent losses.