- Morgan Stanley boosted its call for a “sharp but short” recession ending by 2021 as economies surge back to pre-pandemic output levels.
- The firm told clients in a mid-year review note the global economy is entering a new expansionary phase that’s “more ‘normal’ than appreciated.”
- World GDP will bottom out at an 8.6% contraction in the second quarter before swinging to 3% growth by 2021, the team added.
- Even if a second wave of virus cases emerges in the fall, Morgan Stanley sees “selective lockdowns” keeping the world from reentering strict lockdowns.
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Morgan Stanley is more convinced than ever that the coronavirus recession will be a “sharp but short” blight on the global economy.
The bank doubled down on its call for a V-shaped recovery Sunday, telling clients in a mid-year review note that the cycle is “more ‘normal’ than appreciated.” Despite equities largely erasing year-to-date losses, valuations continue to underprice the chance of a swift turn higher, the team led by Chetan Ahya wrote.
The global economy will roar back to pre-pandemic levels by the fourth quarter and fuel a strong stock-market bounce into 2021, they added.
“We have greater confidence in our call for a V-shaped recovery, given recent upside surprises in growth data and policy action,” Morgan Stanley said.
The advent of a new expansionary cycle should encourage greater risk-taking in other markets as well, the team wrote. The gap between junk and investment-grade corporate credit will shrink, creating an opportunity for those holding higher-yield bonds. Commodity prices will jump on a return to past output activity, though weaker fundamentals for oil risk a slower bounce-back. Government debt from major economies will enjoy higher yields as investors flock back to riskier assets, according to Morgan Stanley.
The firm cited unprecedented policy relief, debt-reduction stresses, and the pandemic’s sudden-shock nature for its forecast. Global gross domestic product will bottom-out with an 8.6% contraction in the second quarter before turning to 3% growth by the end of the year, the team said. Even if a second wave of COVID-19 infections emerges in the fall, Morgan Stanley sees “selective lockdowns” adequately addressing the risk.
In the bank’s bearish scenario, another outbreak would force a return to strict quarantine orders and stymie reopenings currently taking place around the world. The second plunge in consumer demand would fuel a “double-dip” in global output, the economists wrote.
The bank’s outlook is decidedly more optimistic than others’ warnings of a lengthy bout of economic pain. The International Monetary Fund said last week that its upcoming June forecast will “be very likely worse” than previous figures that already described a deep slump.
Though the Federal Reserve didn’t issue a specific GDP forecast after its June meeting, central bank chairman Jerome Powell cautioned that the labour market is in for a “long road” to recovery. Policymakers also expect near-zero rates to last through 2022 to ensure a smooth rebound.
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