Top i-banks envisage grave stress

MORGAN STANLEY SEES US GDP FALLING 30.1% IN Q1, WHILE GOLDMAN SACHS EXPECTS WORLD ECONOMY TO CONTRACT ABOUT 1% THIS YEAR

Morgan Stanley and Goldman Sachs Group Inc. economists said the coronavirus will inflict greater economic pain than they previously expected as they warned of a record plunge in the US output in the second quarter and a deeper global recession.

Morgan Stanley’s US economists led by Ellen Zentner told clients in a report on Sunday that they now see American gross domestic product falling 30.1% in April-june. That will drive up unemployment to average 12.8% over the period, they said.

At Goldman Sachs, Jan Hatzius’s team said in a report that they now expect the world economy to contract about 1% this year, which would be a bigger decline than even that witnessed in 2009 amid the financial crisis. They were already projecting a 24% drop in US output in the next quarter.

The dire forecasts from two of Wall Street’s biggest banks reflects the sudden stop that the US and European economies are witnessing following China’s slump at the start of the year.

Such predictions are raising fears of a depression, but Morgan Stanley economists said in a separate report that a sustained contraction should be avoided given the response of fiscal and monetary policy makers. Both Morgan Stanley and Goldman Sachs anticipate a recovery beginning in the third quarter, although that is subject to risks.

“Economic activity has come to a near standstill in March,” the Morgan Stanley economists said. “As social distancing measures increase in a greater number of areas and as financial conditions tighten further, the negative effects on near-term GDP growth become that much greater.”

In a Bloomberg interview on Sunday, Federal Reserve Bank of St Louis President James Bullard predicted the unemployment rate may hit 30% in the second quarter because of shutdowns undertaken to combat the coronavirus, with an unprecedented 50% drop in GDP. Elsewhere, Bank of America Corp’s base case is for a near 25% drop in second quarter US GDP, while Jpmorgan Chase & Co. forecasts a 14% decline.

Those forecasts come as economists warn that the world is already in recession, its first since 2009’s 0.8% contraction.

For China, most see the worst hit in the first quarter. Jpmorgan Chase have flagged a 40% plunge in Chinese GDP in the first quarter from the previous three months, the biggest contractions in at least 50 years.

Chinese officials, including Premier Li Keqiang, have pointed to claims the outbreak has been controlled and signs of a resumption of activity as reasons for optimism with regards to China’s outlook.