Covid-19 Impact: Morgan Stanley Expects Global Recession In First Half Of 2020

Global economic growth could contract by 2.3 percent year-on-year in the first half of 2020, Morgan Stanley estimates.

Empty streets and sidewalks in New York, on March 19, 2020. (Photographer: Michael Nagle/Bloomberg)
Empty streets and sidewalks in New York, on March 19, 2020. (Photographer: Michael Nagle/Bloomberg)

Morgan Stanley expects a deep global recession in the first half of 2020 on the back of disruptions to the economy’s demand and supply sides following the outbreak of the novel coronavirus.

Growth could contract by 2.3 percent over the previous year in the first half of 2020, Chetan Ahya, chief economist and global head of economics at Morgan Stanley, wrote in a note dated March 29. That’s under the assumption that the Covid-19 outbreak peaks by April/May, with growth recovering to 1.5 percent year-on-year in the fourth quarter of the fiscal.

“Global growth for full-year 2020 will still see a decline of 0.6 percent year-on-year, past the 0.5 percent year-on-year rate of contraction we saw during 2008 and, on our estimates, the weakest pace of growth during peacetime since the 1930s,” Ahya wrote in the note. “At its core, the outbreak represents a substantial shock to incomes, and the impact on aggregate demand will ultimately create renewed disinflationary pressures.”

Here’s what the report said on challenges to global economy:

Triple Challenge

The report points out that even before the coronavirus outbreak, the global economy, in the aftermath of the global financial crisis, was facing the triple challenge of demographics, debt and disinflation, or 3D challenge—which the world last faced in the 1930s. The debt challenge will become more pronounced in the near term as nominal GDP growth weakens and nations, households and corporates face rising levels of indebtedness, it said. Taken together, the brokerage expects these forces to bring the 3D Challenge back to the fore.

Silver Lining

The silver lining is that the coronavirus has elicited a strong coordinated monetary and fiscal response, Ahya wrote. The pace and magnitude at which these policies have been implemented are also unprecedented as 23 of the 30 central banks have eased monetary policy since mid-January, the report said. “The global weighted average policy rate has declined to below post-global financial crisis lows.”

All the G-4 central banks have now announced aggressive quantitative easing programmes and Ahya estimates that they’ll make asset purchases of almost $6.5 trillion in this easing cycle, with cumulative asset purchases of $4-5 trillion by the U.S. Federal Reserve alone.

Looking ahead, he said that as a percentage of GDP, the G4+China cyclically adjusted primary deficit will rise to 8.5 percent of GDP in 2020, significantly higher than the 6.5 percent in 2009 immediately after the GFC. With the help of extraordinary policy action, and assuming an April/May Covid-19 peak, the brokerage expects the global economy to be on the mend from third quarter of 2020 onwards, the note said.

However, based on experience in China, Ahya foresees a tepid pace of recovery initially, and it won’t be until third quarter of 2020 that output reaches pre-Covid-19 levels in the U.S. and Euro area.

On inflation, Ahya wrote that global policies need to remain in place for longer until inflation expectations have systematically risen closer to the central banks’ goals. He cites that expansionary policies were terminated prematurely in 1936-37, the U.S. economy suffered a double dip in 1937-38 so policy-makers must not be too quick to sound the all-clear.

Corrects an earlier version that misstated the time period for the forecast, which is Jan-June 2020, not April-Sept. 2020.