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Morningstar cuts GDP forecasts but tips V-shaped recovery

Karen Andersen and Preston Caldwell  |  01 Apr 2020Text size  Decrease  Increase  |  
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In this update of their COVID-19 research, Morningstar analysts Karen Andersen and Preston Caldwell examine the US's mitigation strategies on a monthly basis for the rest of 2020. They also analyse recent data for drug treatments and report on the status of the most promising programs.

In our base-case scenario, we assume full implementation of aggressive social distancing measures (including closures of schools and nonessential businesses) through most of the second quarter. After that, we think these measures will recede along with the first wave of the outbreak.

Secondary waves of the virus are likely in 2020, but they should be much less deadly, thanks largely to new drug treatments. The key driver of our bear-case scenario is inefficacy of new treatments.

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While a few countries like South Korea and Singapore appear to have brought the virus under control using aggressive but not economically destructive nonpharmaceutical methods, we believe this may be beyond the US' ability.

We now forecast US real GDP growth of negative 2.9 per cent in 2020 (after deducting a COVID-19 impact of 5 per cent). For global GDP, we expect a decline of 1.4 per cent, implying a recession on par with 2008-09.

Indirect impact to US GDP should be capped by aggressive fiscal stimulus


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Our US forecast is based on our detailed scenarios as we project the industry-level impact of mitigation strategies. We think the scope of shutdown orders to disrupt the US economy is probably overrated, as large swaths of the US economy are exempt from the orders. Meanwhile, historically large fiscal stimulus should prevent a collapse in the demand side of the economy.

Overall, we still expect a modest long-run economic impact, with GDP down 0.9 per cent. This is much less than what is implied by the 20 per cent-plus drop in global equities since February. In our view, a COVID-19 recession doesn't fit the mould of a 2008-style recession with longer-lasting economic impact.

We forecast a 2.9 per cent decline in global GDP

Global GDP

Epidemiology and society's response

In our base case (50 per cent probability), we assume that the first wave in the US subsides by the end of May, after which many social distancing measures can be eased due to the existence of at least one effective treatment.

We still assume 20 per cent of the population is infected over the course of the year in our base case, with a slightly higher average death rate of 0.4 per cent (up from 0.3 per cent in our 9 March analysis) and a roughly 1 per cent death rate during the first wave.

The relaxation of social distancing in our base case means that one or more additional waves is likely later in 2020. However, these secondary waves will see a much lower fatality rate (around 0.1 per cent, on par with seasonal flu) thanks to new drug treatments plus quick diagnosis via prolific testing.

Our bull case (20 per cent probability) is distinguished by a much lower infection rate, just 5 per cent of the US population. This accounts for the possibility that the US successfully mimics the tactics used in South Korea and Singapore (massive testing and contact tracing) to halt the spread of the virus. In this scenario, most social distancing measures are lifted by the second quarter.

In our bear case (30 per cent probability), we assume that current social distancing measures are only modestly effective, and development of new drug treatments is disappointing. This necessitates the maintenance of business closures and other stringent measures throughout most of 2020. 

2020 GDP impact, industry level analysis, and long-run impact

We forecast a 5 per cent impact to US real GDP in 2020 from COVID-19, taking the probability-weighted average across our scenarios. Deducting this from our pre-COVID expectation results in a forecast of a 2.9 per cent decline in US real GDP in 2020. This US recession slightly exceeds what we saw in 2009, though it isn't unprecedented in the post-World War II era.

Overall, we think the main driver of lower US GDP will be the direct impact from COVID-19 on certain industries via business closures and voluntary social distancing.

We expect the indirect impact to be substantial at 170 basis points of GDP, because of reduced spending power and economic confidence, but we don't think aggregate demand will collapse. Critically, the US has passed historically large fiscal stimulus, eclipsing post-Great Recession or New Deal-era stimulus.

Our analysis of US GDP at the industry level suggests that even if stay-at-home/shutdown orders are implemented in all 50 states, no more than about 16 per cent of GDP will be highly affected. About 70 per cent of GDP consists of businesses largely exempted from orders as implemented in most states. Among the remaining 30 per cent, around half may be able to continue normal economic activity via remote operations.

We use our detailed US analysis as a benchmark for our updated global GDP estimates. We now forecast 460 basis points of impact to world GDP in 2020, yielding our updated forecast of negative 1.4 per cent real GDP growth in 2020. We think Europe is likely to be hit somewhat harder than the US due to the possibility that its fiscal response is inadequate.

Even with global GDP likely to enter a recession in 2020, we still forecast a modest long-run impact on GDP (0.9 per cent, up from our prior forecast of 0.3 per cent). We still think COVID-19 largely fits the mould of a V-shaped recovery.


. Karen Andersen, CFA is a healthcare strategist at Morningstar; Preston Caldwell is an equity strategist at Morningstar.

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