Global Economics

Expect global economy to fully bottom out by May: Morgan Stanley ‘We are expecting global growth to contract by 3.2% of GDP’/The Economic Times

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The policy response has been far more aggressive this time than what we had seen during the GFC, says chief economist Chetan Ahya. 
How would compare the global Covid-linked recession with the previous one which was rather triggered by the Global Financial Crisis? How is it that you would analyse and differentiate between what happened in 2008 and what is playing right now in 2020? 

We think this is a sharper but shorter recession compared to GFC and there are three reasons why. First is that this is a crisis which did not start out as a financial crisis. The private sector leverage in the US before the crisis was already declining and the financial system was in a much better shape.  

The second difference is that we have got an aggressive policy response. So when you think of the G4 central banks and government spending, it has been far more aggressive than what we had seen .. during GFC. The third is, we think that the situation will somewhat be in control faster than what the market is thinking about right now. So these are the three reasons why we think it will be a shorter recession than GFC. 
To counter this impending recession, governments and central banks across the world have actually injected liquidity into the economy. India as well has seen an economic package to the tune of about 10% of its GDP. How do you see the scale of the stimulus being announced across the globe and the effectiveness in actually cushioning the blow from Covid-19? 

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When you think about the fiscal policy for G4 plus China, we expect the fiscal deficit in 2020 to be at 10.2% of GDP versus 4% in 2019. So there would be close to 6% of GDP expansion in fiscal deficit for G4 plus China and the numbers that I give you are the primary deficit. So this is really the stimulus as is measured by cyclically-adjusted primary fiscal deficit; so this is the real stimulus. So that is quite aggressive. 

When you think about the Fed alone, we are expecting the fiscal deficit to expand to 19% of GDP on a headline basis, which would be including all the measures that have been announced so far and there is a talk about an additional trillion dollar fiscal expansion. So that will take the US government deficit to 24% of the GDP and that compares to the 27% that we had seen in 1942 due to World War II. So this is a very aggressive fiscal expansion that the US government is taking up. So when you think about the policy response in total on the central bank side and from the government side, this is totally unprecedented. 

How deep do you think this recession could be? If you are saying that there is going to be a fall, how would you measure the extent of the fall? 
In terms of the nature of recession, we are expecting global growth to contract by 3.2% of GDP. So in terms of the depth of this recession, we are expecting global GDP to contract by 3.2% and when you are thinking about the recession per se compared to GFC, what we also look at is the number of quarters it takes for the output level .. 

to get back to where it was before Covid-19 shock hit us. So for instance in developing markets, we expect the output levels which if you were to assume it was at 100 in December 2019 quarter; we expect it to get back to that 100 level only by fourth quarter of 2021. But this would still be a shorter recession compared to GFC because in GFC, we took 14 quarters to get back to the same level of output we were before the crisis. 
What are the high frequency data points on your radar which will tell you how things are moving? 

Right now the most important high frequency indicator is mobility trend and when you look at the mobility trend, they have started to improve across the world and our analysis from looking at this trend and other high frequency economic indicators is showing that China bottomed in the month of February; the US and Europe bottomed in the month of April and some of the other EM ex-China economies will bottom out in May. So all in all, by the month of May, we would have seen the global economy fully bottoming out and having to show improvement in growth. 

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