First it was Goldman cutting its Q2 GDP to -5% just one week ago; then JPM quickly upstaged Goldman by slashing its own Q2 GDP forecast to -14%. Then Goldman, which just last December said the US economy is “nearly recession-proof” decided to really show JPM who is boss and nearly doubled this dismal prediction, and on Friday predicted a great depression-like -24% crash in Q2 GDP. And now, in this race to come up with the most apocalyptic GDP number imaginable, here comes Morgan Stanley which expanded its former Q2 GDP -4% prediction nearly 8x to -30%, a number that would have seemed almost insane in isolation… if only it wasn’t for St. Louis Fed president James Bullard coming up with an absolutely staggering -50% worst case scenario earlier today.
Here are the highlights from the report which we expect, just like all other bank forecasts, will be revised to an even more cataclysmic number in days if not hours:
We now see 1Q GDP dropping by 2.4% as economic activity has come to a near standstill in March, followed by a record-breaking drop of 30.1% in 2Q. We estimate that March will also mark the first drop in nonfarm payrolls, down 700k. We expect a record-high unemployment rate, averaging 12.8% in 2Q.
We assume sharp declines in areas of consumer discretionary spending like travel, dining out, other services and motor vehicle spending among others. This will leave a large hole in consumer spending in 2Q, when we expect real personal consumption expenditures to contract at a 31% annualized pace.
While ready to upstage both Goldman and JPM’s pessimism, Morgan Stanley was unwilling to break the mold with the other banks, and just like them sees a sharp V-shaped rebound in Q3, even though as Goldman warned a V-shaped recovery is certainly not to be taken for granted:
We expect that 3Q will look somewhat better as consumption climbs back to around its pre-virus level.
On the other hand:
The outlook for business investment is likely to look more U-shaped, and residential investment should follow a similar pattern.
How about US unemployment? Nothing good. With both Goldman and JPM expecting tremendous surged in joblessness in the coming weeks, Morgan Stanley has outdone them both and writes that “on April 3 we expect the Bureau of Labor Statistics to report that total nonfarm payrolls declined by a net 700,000 in March.” Some more details:
The bulk of the weakness in March payrolls likely comes from a decline in hiring as opposed to firing. However,as we move into April, it will be both a surge in layoffs as well as a shutdown in hiring that will bring about the darkest days for the labor market since the financial crisis.
A corresponding 700,000 decline in household survey employment in March would raise the unemployment rate by 70bp from 3.5% to 4.2%. As we move into 2Q, we forecast the unemployment rate to surge, averaging 12.8% in the quarter (Exhibit 8) – the highest among records dating back to the 1940s.
Thereafter, the unemployment rate begins to move lower as growth in the economy is sustained above potential,and we see the unemployment rate reaching an average of 5.4% in 4Q21. The evolution of the unemployment rate ultimately will be determined by how well fiscal stimulus is able to support small businesses,how quickly economic activity normalizes,and how attached to the labor marketunemployed workers remain. In these early days we think that the impact on labor force participation should remain mild as workers view the impact of COVID-19 as transitory. But the longer it takes for activity to normalize, more workers may exit the labor force altogether
Finally, what does this mean for the global economy?
Incorporating revised forecasts for the US economy, we see an even deeper recession in 1H20, taking full-year global growth to 0.3%Y.
If the COVID-19-related economic disruption continues into 3Q20, in the bear case scenario we see global growth contracting by 2.1%Y in 2020, which will bring the global economy well below what we saw during the global financial crisis, when global real GDP contracted by 0.5%Y in 2009.
What is scariest about all of the above is not the numbers which are just pure guesswork, but that with every passing day – literally – the forecasts get slashed lower and lower and with no turn in new coronavirus cases in sight, it just may be that by the time this is over, consensus will expect a -100% drop in US GDP. How one successfully “v-shaped rebounds” from that is anyone’s guess.