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Morgan Stanley Expects V-Shaped Recovery, Citigroup Says Not So Fast

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Morgan Stanley Expects V-Shaped Recovery, Citigroup Says Not So Fast

Analysts at Morgan Stanley expect the US to go through a “sharper but shorter” recession. They believe a v-shaped recovery can possibly occur after looking at recent data.

On Sunday, Chetan Ahya, chief economist at Morgan Stanley, said the resiliency of the American consumer has increased his confidence in a quick economic recovery as states slowly lift their economic lockdowns.

“We have been pleasantly surprised by incoming growth data and policy actions. These upside surprises are increasing our confidence in a deep V-shaped recovery,” he noted, saying that credit-card transaction data show that sales have rebounded from a 30% decline a few weeks ago and are now growing at 5%, showing pent-up demand from consumers.

Ahya also credits the Federal Reserve and lawmakers in Washington for a quick fiscal and monetary response to the crisis. He says the Federal Reserve moved quickly to cut rates. Also, congress implemented legislation that provided a much-needed stimulus to keep the economy from grinding to a halt. He mentions that the steps were necessary since there was no blame for the economic lockdown.

“Policy action has been far more decisive than during the [global financial crisis] for a simple reason—this recession is nobody’s fault!” Ahya wrote.

The Opposing Opinion

Manolo Falco, investment banking co-head at Citigroup, disagrees with Ahya. Falco believes any hope of a v-shaped recovery won’t be likely.

“Markets are pricing a V [shaped recovery], everyone’s coming back to work, and this is going to be fine,” Falco said. “I don’t think it’s going to be that easy quite frankly.”

Falco says we’ve only started to see the effects of the lockdown. He also believes things will become worse from here.

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“As the second quarter comes along and we start seeing the pain, and the collateral effects of that, we think this is going to be much tougher than it looks.”

The bank has gone as far as suggesting to its corporate clients that they quickly raise as much money as they can. They need to do this before the true damage from the slowdown becomes evident and the cost of borrowing surges higher.

“We definitely feel that the markets are way ahead of reality. We really are telling every client to tap the market if they can because we think the pricing now couldn’t get any better,” said Falco.

Falco joins a growing list of voices like Meghan Shue, the head of investment strategy at Wilmington Trust, that believe a v-shaped recovery is unlikely.

The economic hit will become quite dramatic — “probably 40% on GDP for the second quarter,” said Shue.  She also says it seems the market’s “pricing in a pretty robust V-shaped recovery, and we just don’t see that as likely.”

We’ll get a better idea of how the American consumer is faring later this week. It will come weekly unemployment figures released on Thursday. Also, the May non-farm payrolls and unemployment rate released on Friday.

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