'No economic depression,' says Morgan Stanley

Since further deterioration in the COVID-19 outbreak was severely damaging the global economy, Morgan Stanley said they expect world economic growth to dip close to GFC (global financial crises 2008) lows and US growth to a 74-year low in 2020. Assuming new confirmed cases peak in April/May, with an aggressive monetary and fiscal policy response in the pipeline we expect growth to start recovering from the third quarter of 2020, and the key risk is that the disruption continues beyond the second quarter of 2020, the research house said.

The pace of recovery depends on the path of COVID-19.

In our base case estimates, we assume the virus peaks by April/May 2020 and growth begins to recover from 3Q2020. However, if the peak comes later and virus-related economic disruption continues into 3Q20, we expect global and US growth to contract, Morgan Stanley said.

However, it says that unlike the 1930s, there has been a quick and sharp policy response to COVID-19. In the 1930s, the economic shock resulted in relatively high levels of private-sector indebtedness. In the immediate aftermath, companies turned risk-averse. They shifted their attention to restoring balance sheet health, which produced a sharp drop in private demand. To make matters worse, during early 1930s, policymakers pursued tighter macro policies in the first three years after the shock.

Pace of policy response – grounds for optimism on growth

The good news is that unlike in 1929-33, we already see an aggressive policy response. Back then, strict adherence to the gold standard further exacerbated the deflationary tendencies. The Federal Reserve also maintained a hawkish monetary policy stance for an extended period, exemplified by its allowing the money supply to contract by one-third over 1929-33. This reinforced deflationary pressures, leading to four consecutive years of deflation in the US, from 1930-33. The sharp drop in demand and intense deflationary pressures extended to Europe, with the key economies of the UK, Germany and France are experiencing deflation over the same four-year period.

In contrast, the response to the current economic shock has been extremely aggressive. With the experience of the 2008 crisis still fresh in policymakers’ minds, policy actions over the last few days have been vigorous, especially in the G4 and China, Morgan Stanley said. It expects an aggressive monetary response in the pipeline.

Since mid-January,22 of the 30 central banks we cover have eased monetary policy. The global weighted average policy rate has declined below post-GFC lows – by 54bp since December 2019 and 166bp since December 2018. When the BoE relaunches its QE program, we will have all G4 central banks back on the quantitative easing path. By the end of 2Q20, we expect 25 central banks to be easing, implying better monetary support than we saw in the aftermath of the GFC. Fiscal easing in the G4 plus China economies will exceed rise GFC levels

While the initial response from developed economies was slow, over the last few days – with economic and financial market disruptions persisting – we have started to see strong commitments from policymakers, indicating that a sizeable fiscal expansion plan is in the offing. We now expect that in the G4 plus China, the combined primary fiscal balance will increase by 320bps (~US$1.9 trillion). As a percentage of GDP, the G4+China cyclically-adjusted primary deficit will rise, reaching 7.3% of GDP in 2020,higher than the post-crisis low of 6.5% in 2009. In the US alone, we expect the cyclically-adjusted primary fiscal deficit to rise to 9.9% of GDP in 2020 (assuming a stimulus of US$1.4 trillion) compared with 7.0% of GDP in 2009, Morgan Stanley report said.