Global economy is likely to slip into a recession triggered by the fast-spreading coronavirus (COVID-19) with growth dipping to 0.9 per cent year-on-year (YoY) in 2020, said analysts at Morgan Stanley in a recent report. The global recession, they said, will be deeper than seen in 2001.
“Assuming this outlook of Covid-19, we expect 2020 global growth to dip to 0.9 per cent, the lowest since the global financial crisis (GFC). The global recession this year would be deeper than in 2001. We expect global growth to contract by 0.3 per cent in the first quarter (January – March) of 2020 (Q1-20) and 0.6 per cent in 2Q20,” wrote Chetan Ahya, chief economist and global head of economics at Morgan Stanley in a co-authored report with Derrick Y Kam, Nora Wassermann and Frank Zhao.
Though the policy response from global central banks will help limit the downside, the impact of the virus and tighter financial conditions, Morgan Stanley believes, will still produce significant shock waves in the global economy.
Those at BofA Securities, too, echo a similar view. Their Fund Manager Survey (FMS) for March suggests investor sentiment to have collapsed on the back of the coronavirus, oil shock, recession, and surging debt default risk.
“Outbreak of COVID-19 against an already fragile macro backdrop led to the biggest monthly drop in global growth expectations ever. A net 49 per cent investors expect global growth to deteriorate over the next 12 months,” the BofA Securities Fund Manager Survey findings for March suggest.
The collapse in risk appetite also led to March 2020 seeing the biggest month-on-month (MoM) drop in global equity allocation (-) 35 percentage points since 2001. 62 per cent of the fund managers surveyed by BofA Securities believe fiscal policy is restrictive, which is a record high. Governments, they said, need to do more than the $1.9 trillion spending currently committed to tackle the economic fallout from the current health crisis.
In a concerted effort to boost the economic fortunes amid COVID-19 scare, global central banks have been aggressive in cutting rates over the past few weeks. The US Federal Reserve (US Fed), in a surprise move, cut its key interest rate to a target range of 0 per cent and 0.25 per cent on Sunday. This comes close on the heels of a rate cut done on March 3. Bank of England, and the central banks of Australia and New Zealand, too, have slashed rates.
“With the Fed’s announcement on Sunday, all the G4 central banks are back on the quantitative easing path. At 0.48 per cent, the global weighted average policy rate sits far below post-GFC lows, having declined by 54bp since December 2019 and 166bp since December 2018. We think it has further to go, with 25 central banks on the easing path by 3Q20 since mid-January,” analysts at Morgan Stanley wrote.
Most investors, according to BofA Securities, prefer cash with its allocation in their portfolio rising 32 percentage points to 41 per cent in March. This is the biggest MoM jump in allocation to cash ever. The biggest tail risk, they believe, is COVID-19 with 58 per cent of the respondents agreeing to this, followed by monetary policy impotence (15 per cent), outcome of 2020 US Presidential election (11 per cent) and bond bubble pops (6 per cent).