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Coronavirus: The world is heading for a recession in 2020

American multinational financial services giants, JP Morgan and Morgan Stanley, have now officially forecast a coronavirus-driven global recession starting the second quarter of 2020. 

The world, JP Morgan, said is facing an ‘assured economic depression in Q2 and the only question is whether this depression persists into the second half and 2021 or reverses in Q3’.

Morgan Stanley meanwhile updated its base case and said that global growth will slip to 0.9% in 2020 after contracting in the first half of the year. There are some naysayers who are already painting a ‘Great Depression of 1930s’ picture, saying that the world will take a very long time to recover from the coronavirus recession, and global recession could last for more than a decade.

However, Morgan Stanley stated that the ‘coronavirus recession’ might be harsher than the 2001 down but not as bad as the 2008 financial crisis.

The Wall Street majors said that China is likely to bear the brunt of the recession in the first quarter, with its economy shrinking by 5%, while the US economy will contract by 4% in the second quarter.

How quickly there will be a recovery would depend on “a combination of ‘price to perfection’ events all turning out just as hoped for.

“Which, in a world of record political polarization, ascendant nationalism, and a torn social fabric, is a recipe for not only disappointment but also disaster,” JP Morgan said.

Here are some of the inferences that the investment banks’ studies have drawn:

China collapses in Q1: China’s Q1 GDP growth rate predictions have been slashed and economies closely tied to the China supply-chain (such as Korea and Taiwan) will directionally follow China’s growth path. Forecasts there have also been lowered.

The United States and Europe will follow:  For the US and Western Europe, the COVID-19 shock will likely straddle the first two quarters of the year.

The stall in activity in March is likely sufficient to tip both economies into contraction this quarter but the shock’s impact is expected to be concentrated next quarter, where both regions are expected to contract at a double-digit annualized pace.

These outcomes are worse than were recorded during the global financial crisis or the European sovereign crisis.

Emerging Markets not immune: While the COVID-19 shock is moving more slowly through Emerging Market countries outside Asia, their vulnerability is increasing along a number of fronts.

In addition to their heightened sensitivity to falling Developed Markets demand for manufactured goods and commodities, they are experiencing a significant tightening in financial conditions. Oil producers are experiencing concentrated terms-of-trade losses. Finally, their relatively weak public health.

However, the forecasters anticipate central banks around the world to take steps to respond to the crisis by most likely cutting interest rates in a bid to boost economic activity and to increase liquidity in the markets.

JP Morgan admitted that economic recovery is contingent on three catalysts all playing out as expected:

Relaxation of social distancing policies by mid-2020: “Implicit in the forecast is the view that the imposition of aggressive containment measures will cause the number of active infections to peak around 10 weeks after the confirmation of cases in individual countries.

The fading of the virus threat, alongside a growing recognition that the economic costs of maintaining aggressive containment policies are very large, should then begin a process of selective removal of containment measures,” JP Morgan said.

Success of targeted policies: One of the consequences of the global financial crisis is that policymakers have experience in dealing with acute financial sector stress.

As such, they are moving rapidly to attempt to ameliorate the threat to financial market functioning and are working to cushion the blow to corporates and households most impacted by the shock.

Ensuring that credit will be provided by banks, deferring (or cancelling) tax payments, and subsidies for short-time work have been key areas of focus,” JP Morgan said.

Monetary policy stimulus: Usually it is monetary easing -- or a cut in interest rates -- that provides the initial line of defense in responding to an economic slowdown.

However, the constraints facing central banks and the flexibility provided to fiscal authorities in an extremely low interest rate environment suggest that fiscal easing will be delivered earlier in this episode.

However, the Wall Street majors added that the risk will increase significantly if the coronavirus outbreak persists and business activity is restricted for a longer period of time.

In such a scenario, risks to the global economy will magnify. 

However, Goldman Sachs expects the global, and especially the US, economy to bounce back sharply by the end of 2020.