Morgan Stanley predicts ‘sharper V’ recovery to take hold by 2Q21

<br>”The V-shaped recovery that we originally envisaged is playing out faster than we thought. By 2Q21, a global synchronous recovery should take hold, with all engines of the global economy registering strong growth. Risks to our view include a potential aggressive lockdown in the winter and uncertainty about fiscal policy,” read the opening lines of the September 7 report anchored by the bank's chief economist Chetan Ahya and team.

Morgan Stanley's “base case” leans heavily on the passing of an incremental $1.75 trillion stimulus package in 2020. The report sees a “significant downside risk” to growth estimates if the bill is not approved by Congress before the Presidential elections in November.

The bank frames the global macro outlook around three themes that are “surprising to the upside”.

Morgan Stanley analysts believe that the virus-economy equation has changed “decisively”, progress on vaccines and therapeutics is generally on the right track and policy easing has now been hardwired into economic systems.

“The outlook for Covid-19's impact on the economy has changed dramatically, with most large economies able to lift economic activity to much higher levels despite the ongoing virus spread,” says Page 1 of the report's headline takeaways.

Much of the upbeat tone is structured around the medical community's response to the Covid-19 vaccine discovery process and the nature of the virus' deadly blow which Morgan Stanley describes as “exogenous shock”.

“Since the virus is an exogenous shock, policy-makers continue to provide aggressive support as there are no serious moral hazard concerns this time.”

According to the report, the “evidence indicates that the virus/economy equation has shifted decisively from the early days of the outbreak”.

The bank lists three key risks that could change the game on its latest assessment. Right on top, predictably, is the trajectory of the virus itself.

“Our forecasts are assuming that the potential new round of Covid-19 infections will remain relatively manageable, and that policy-makers will find other tools to combat them than the aggressive lockdowns of early 2020 (if needed).”

The second risk is related to the US election and the ongoing chaos around mail-in voting. If the final results are delayed significantly, the report points to that as a “temporary negative for the economy” which will “increase volatility in financial markets.”

And finally, escalation of trade tension, especially US-China. “Major disturbances to global trade channels and supply chains could slow or even choke off the recovery.”

Here's the big tent timeline from the latest Morgan Stanley report: “The global and DM economies will reach their respective pre-Covid-19 levels by early 4Q20 and 3Q21. The US will achieve pre-recession output levels in six quarters (i.e., by 2Q21) versus the 10 quarters it took during the global financial crisis (in our earlier forecasts the US economy reached pre-Covid-19 levels by 4Q21).”

(Nikhila Natarajan is on Twitter@byniknat)


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