IMF Anticipates Brutal Recession, Then a Quick Recovery

MANHATTAN (CN) — Sickened by the novel coronavirus, the world faces a deeper recession than it did in 2008 but likely — or perhaps hopefully — a quicker rebound, according to a pair of reports Tuesday by the International Monetary Fund.

The first report forecast global growth falling at least 3% in 2020, a major downgrade from the monetary organization’s last prediction in January. Economists at the international organization also predict, however, banks will be able to weather the storm easier than during the Great Recession. 

“This is a truly global crisis,” Gita Gopinath, director of IMF’s research department, said during a webcast. She warned that global growth could decline by up to 8% globally in a worst-case scenario.

The United States is projected to contract by 5.9% this year, the IMF reports states, not nearly as bad as many European countries that are projected to lose 7% or greater in GDP. 

A message taped to the door of a San Diego nail salon contradicts the open sign in the window. It is one of millions of businesses across the country to shut down in response to Covid-19, a deadly respiratory infection caused by the novel coronavirus. (Photo by BARBARA LEONARD/Courthouse News Service)

Global growth will recover by 5.8% in 2021, the IMF predicts, with the United States growing by 4.7%.

“I wouldn’t call the IMF report bullish in any way. If anything, it is quite sanguine,” said Jacob Kierkegaard, a senior fellow at the Peterson Institute for International Economics. 

“They are saying the rebound will be at the same pace before the crisis,” he said in an interview. “That is not a V-shaped recovery. That is more of a Nike Swoosh or something like that.”

A second IMF report on financial markets released later Tuesday morning found that banks are in a better position now than they were prior to 2008 and markets are recouping some losses.

“The banking system has much more capital and much more liquidity than it had at the onset of the 2008 crisis,” Tobias Adrian, IMF’s director of monetary and capital markets, said during a webcast.

Adrian noted a decade of stress tests and more stringent regulations have strengthened financial firms, but he cautioned “the resilience of banks may be tested in a sharp slowdown of economic activity, which may be more prolonged than anticipated.”

Kierkegaard noted the comparisons to the 2008 crisis may be misplaced, since mostly Western countries suffered during that financial downturn. “The Great Recession was very much centered in the U.S. and Europe, while other areas did a lot less worse than we did,” he said. “That’s clearly not the case this time.”

Still, investors so far remain fairly confident the U.S. economy can get back on track. By closing bell, the Dow Jones Industrial Average immediately recouped the 300 points it lost on Monday and gained an additional 260 points and closed 2.4% up for the day. The S&P 500 and Nasdaq had even greater gains, increasing 3% and nearly 4%, respectively. 

Job losses and reduction in investment continue to skyrocket, however, potentially hindering growth into next year. 

“This is a deep recession,” Gopinath said. “It is a recession that involves solvency issues. It is a recession that involves unemployment rates going up dramatically, and these tend to leave scars.”

As companies begin releasing their first-quarter earnings results, it appears some industries already have scars to show.

JPMorgan Chase reported its first-quarter income fell more than two-thirds year over year, from $9.1 billion in the early part of 2019 to $2.8 billion during the first quarter of 2020. 

In an earnings call with investors, JPMorgan Chase CEO Jamie Dimon said the bank “entered this crisis in a position of strength, and we remain well-capitalized and highly liquid.”

Unsurprisingly, Dimon — who earlier this year warned investors of a “bad recession” — said the firm had built $6.8 billion in credit reserves “given the likelihood of a fairly severe recession.”

Wells Fargo also saw a major dip in net income, with $653 million during the first quarter of 2020 compared with $5.9 billion during first quarter of 2019.

Shares of Wells Fargo and JP Morgan both remained relatively flat on Tuesday.

(AP Photo/Rick Bowmer, File)

Health care firms are poised to do better. Industry leader Johnson & Johnson beat Wall Street expectations by posting $5.8 billion in earnings and announcing on Tuesday it was raising its quarterly dividend more than 6%.

The company is now banking much of its future on a vaccine for Covid-19.

Last month Johnson & Johnson announced it had developed a lead vaccine candidate, and the company expects to conduct human clinical studies in September with up to 900 million doses produced by the end of 2021’s first quarter.

Some say Wall Street’s optimism may be unfounded, and that markets can still bottom out.

“Investor sentiment has stabilized in recent weeks,” Adrian said. “Sentiment continues to be fragile, however.”

Adrian warned some investors may begin to deleverage their portfolios. 

“As firms become distressed and default rates climb higher, credit markets may come a sudden stop, especially in risky segments like high yield, leverage loan, and private debt markets,” he said, referring to markets worth about $9 trillion globally.

In an investor note Tuesday, BK Asset Management Managing Director Boris Schlossberg speculated that “investor sentiment may be far too optimistic with respect to the global economy.”

“Most of the analysts are asking – ‘when will the economies return back to work?’ — which we believe is the wrong question,” Schlossberg wrote. “The much more relevant question is — ‘When will aggregate demand recover to pre-virus levels?

“That is a much more difficult dilemma to assess given the massive damage done to consumer balance sheets,” he added.

Nearly 2 million have contracted coronavirus worldwide, while 123,000 have died, according to data compiled by researchers at Johns Hopkins University. In the United States, 584,000 have been confirmed to have the virus, and 24,000 have died. 

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