SINGAPORE (Mar 17): The Covid-19 outbreak has now moved on to Europe and the US, after rattling the Asian stock markets. This, according to Morgan Stanley, is a sign that a global recession in 2020 is inevitable.
According to Chetan Ahya, chief economist and global head of economics at Morgan Stanley, the economic damage of the spread will be “severe”, and that’s putting it mildly.
“This time will be worse than the global recession of 2001,” says Ahya.
“While the policy response will provide downside protection, the underlying damage from both Covid-19’s impact and tighter financial conditions will deliver a material shock to the global economy,” he adds.
Morgan Stanley’s US biotech analyst Matthew Harrison estimates that new coronavirus cases are likely to peak only around the second half of April or May, on the basis that public and private sectors chip in with a meaningful health policy response.
The way Ahya sees it, China should see the impact of the virus in 1QFY2020, while the rest of the world can expect a slightly delayed impact in 2QFY2020.
“We think combined monetary and fiscal easing will help to revive the global economy from 3QFY2020, while a contraction in y-o-y growth in 1HFY2020 will still be inevitable,” says Ahya.
The impact of Covid-19 will be most evident in three areas - disruption and dislocations in business activity and the spillover effects on global supply chains; demand destruction, as well as the impact of tighter financial conditions and dislocations in the financial markets, particularly in corporate credit.
Amid all the chaos, Ahya urges investors to brace themselves for further dislocations in the financial markets.
“Global recession will seriously damage corporate profitability and impair balance sheets, triggering corporate credit risks and further damaging the cycle,” says Ahya. “Investor uncertainty and anxiety has produced serious dislocations in financial markets, particularly credit.”
However, Morgan Stanley is betting on strong monetary policy responses from global economic heavyweights such as the US, China and the ECB to give the economy a boost.
“Since mid-January, 18 of the 30 central banks we cover have eased monetary policy,” notes Ahya.
He anticipates that the most aggressive fiscal policy action will come from China, which will see its primary fiscal deficit expand by a “sizeable” 230 basis points.
The ECB, US and UK are also likely to implement major fiscal expansion, which will increase their fiscal deficits by 100, 220 and 130 basis points respectively.