Wall Street Agrees the World Is in Recession, Disagrees on Depth

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Wall Street economists are united in declaring that the coronavirus has forced the world economy into a recession, but they are divided over its depth.

In what Ethan Harris, chief economist at Bank of America Corp., calls “forecast leap frogging,” strategists have been forced to repeatedly cut their predictions for global growth as the virus spread from China to Europe and the U.S.

Now those at the big U.S. banks are unanimous that the first worldwide recession since 2009’s 0.8% contraction is underway. “The day the earth stood still,” is how economists at JPMorgan Chase & Co. are putting it.

Most see the worst for China in the first quarter and the rest of the world in the subsequent three months. JPMorgan Chase pencil in an eye-popping 40% plunge in Chinese gross domestic product in the first quarter from the previous three months, while predicting a 14% drop in the U.S. in the second quarter. Both would the biggest contractions in at least 50 years.

Such sudden deterioration is enough to shove the world into recession, which because of typically fast-growing emerging markets most economists say is growth below 2.5%.

But uncertainty toward the virus’s effect means there is doubt over 2020 as a whole. The JPMorgan economists project a 1.1% slump over the year, while those at Citigroup Inc. expect growth of 1.4%.

Here’s a rundown of what the big banks are saying in reports this week with their predictions for the world and biggest economies in brackets:

Bank of America (Global: 0.3%, U.S: -0.8%, China: 1.5%)

“Something similar to what happened in China is happening in the rest of world. Since Western democracies cannot match the scope of the Chinese shutdown, their disruptions will probably run for a longer period. That means that the global economy will be exceptionally weak in first half 2020, with the timing of the shock following the path of the virus and the resulting quarantine measures. China is likely to see a dramatic fall in the first quarter, the shock to the rest of Asia and Europe should be spread over the first quarter and second quarter and the U.S. downturn will be concentrated in the second quarter.”

JPMorgan Chase (Global: -1.1%, U.S.: 1.8%)

“There is no longer doubt that the longest global expansion on record will end this quarter. The key outlook issue now is gauging the depth and the duration of the 2020 recession. As the virus spreads rapidly across the globe, we have also been rapidly adjusting our estimates of the impact on first half 2020 growth. This week we have again lowered forecasts. For China this quarter and the rest of the world next quarter, these GDP declines represent the biggest quarterly contractions recorded over the past 50 years at least.”

Goldman Sachs Group Inc. (Global: 1.25%)

“We have sharply downgraded our GDP forecasts across most of the world’s major economies. These downgrades reflect our expectation that the escalation of the coronavirus crisis — and the partial or complete shutdown of important sectors of major economies — will weigh heavily on GDP in Europe and the US, especially in the second quarter. The risks even to our new 2020 numbers remain on the downside.”

Morgan Stanley (Global: 0.9%, U.S.: 1.6%, China: 5.0%)

“With Covid-19 spreading in Europe and the U.S. after hitting Asia, the disruptions and dislocations in the economy and markets will trigger a year on year contraction in global growth in the first half of 2020. However, the strong monetary and fiscal policy response under way will help to revive global growth from the third quarter of 2020.”

“We are monitoring two key risk factors: (1) The duration of Covid-19-related economic disruption; and (2) The duration of dislocations in financial markets, especially credit. If disruption from Covid-19 persists into the third quarter, we could see an even deeper recession, with 2020 global growth averaging -0.6%.”

Citigroup (Global: 1.4%, U.S.: 1.4%, China: 3.7%)

“Data emerging over the last few weeks on the health and economic effects of the virus have been striking. Consumer activity, business investment and overall sentiment are being affected by recommended social distancing and/or lockdowns. Uncertainty over how deep the shock might be, how long the disruption might last, and what shape any recovery might take exacerbate financial fears, and financial markets have responded with a vengeance.

“fIt is difficult to ‘find a bottom’ if the ‘fundamentals’ are so uncertain. But, financial market turbulence feeds back to accentuate consumer and business concerns. Policy authorities are trying to ameliorate, offset, and stem the health, economic, and financial crises. The success of their efforts, as well as behavioral responses of consumers and businesses, will determine whether the base-case projections for 2020 evidence or whether the alternate-downside outcome (or worse) takes place.”

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