Morgan Stanley
  • Research
  • Apr 3, 2020

Coronavirus: Recession, Response, Recovery

Falling demand and disrupted supply chains will trigger a global economic recession. However, strong monetary and fiscal policy responses under way could set the stage for a second-half rebound.

Editor's note: This article has been updated since its original publication to include recently released data and commentary.

In just a matter of days, the fight against the coronavirus pandemic—in Italy, broader Europe and the U.S.—has significantly intensified. While most governments and private companies in these economies are initiating more stringent social-distancing measures to contain the spread of the outbreak, the economic damage to the global economy could be significant.

On the positive side, we are already seeing an aggressive policy response across the world to shore up businesses and workers, maintain liquidity in markets and inject stimulus to create the necessary conditions for a more robust recovery from this shock to the global economic system.

How do we see the way ahead? We start with a model for the path of this pandemic. In his base case, our U.S. biotech analyst, Matthew Harrison, now expects new confirmed coronavirus cases to peak in April/May. In that scenario, given the aggressive monetary and fiscal policy responses in the pipeline, we would expect economic growth to start recovering in the third quarter of this year. The risk to this forecast: Disruption to most pillars of the economy that continues beyond the second quarter.

Growing disruptions to the U.S. economy are key to this outlook. Chief U.S. Economist Ellen Zentner now expects a full-year 2020 contraction of 3.0%, instead of her previous 0.6% growth forecast. Such a decline would trim global growth to 0.3% for 2020 from the 3.4% we forecast before the outbreak—close to 2009 Global Financial Crisis (GFC) lows, when the global economy contracted by 0.5%.

Many uncertainties lie ahead, but assuming our base case for new infections of the novel coronavirus to peak in April/May, the bulk of the economic pain could be concentrated in the first half of 2020, with the global economy contracting on an annualised basis by 0.6% and 2.1%, respectively, in the first and second quarters. If a recovery takes root in the third quarter, the global economy could rebound to 4.8% growth, year on year, in 2021.

A Deeper Recession, but Not Depression in 2020

Source: Haver Analytics, IMF, Morgan Stanley Research forecasts. Note: 1) Our bull, base and bear case forecasts are primary anchored around the impact of COVID-19. 2) Global real GDP includes economies under Morgan Stanley Research coverage and the growth rate is the PPP-based GDP-weighted average.

A Quick and Sharp Policy Response

Even before the coronavirus outbreak, the post-GFC global economy had been facing the triple challenge of demographics, debt and disinflation, which we last faced in the 1930s. From a big picture perspective, the coronavirus pandemic growth shock foregrounds these structural issues.

The good news: Unlike in 1929-1933, we are already seeing an aggressive policy response. With the experience of the 2008 crisis still fresh in their minds, policymakers around the world have mounted a vigorous defense over the past few days, especially in China and the G4 nations—euro area, Japan, and the UK and the U.S.

Since mid-January, 22 of the 30 central banks we cover have eased monetary policy. The global weighted average policy rate has declined below post-GFC lows—by 54 basis points since December 2019 and 166 basis points since December 2018. Once the Bank of England relaunches its quantitative easing program, we will have all G4 central banks back on the QE path. By the end of the second quarter of 2020, we expect 25 central banks to have eased, implying better monetary support than we saw in the immediate aftermath of the GFC.

Regional Impact

In the U.S., where social distancing and coronavirus disruptions to economic activity have become pervasive, Chief U.S. Economist Zentner expects sharp declines in consumer discretionary spending, in areas such as travel, dining out and motor vehicle spending, which expects to lead to a 2.4% drop in first-quarter GDP, followed by a record decline of 30.1% in the second quarter. However, third-quarter GDP could look somewhat better, as consumer consumption climbs back to around its pre-virus level. The outlook for business investment is likely to look more U-shaped, Zentner says, with residential investment following a similar pattern.

This slowdown in the U.S. will have a significant impact on China. Chief China Economist Robin Xing now sees downside risks to the country's growth, due to weaker demand from the U.S. and other regions. Meanwhile, a weaker job market, combined with prolonged social distancing could constrain its domestic consumption recovery. His base case for China’s economy is now 4% growth for 2020 and 7.5% for 2021.

In the euro area and the UK, Chief Economist Jacob Nell expects a heightened fiscal response, as coronavirus cases increase and social distancing becomes more stringent. Germany and the UK have already stepped up their efforts in recent days. Nell now expects other nations—notably France, Spain and Italy—to follow suit. He now expects the euro area economy to contract by 5% this year, and the UK’s GDP to contract by 5.1% in 2020. Assuming that the pandemic peaks by April/May, euro area and UK growth could rebound 5.5% and 5.6%, respectively, in 2021.


For more Morgan Stanley Research on the impact of the coronavirus on the global economy and markets, speak to your Morgan Stanley financial adviser or representative for the full report, “Deeper Recession, but Not Depression” (23 March 2020). Plus, more Ideas from Morgan Stanley's thought leaders.