Recession: How Deep, How Long?

Feature Stories | Apr 01 2020

A recession is a given, as is an eventual stock market recovery. But a recovery is entirely dependent on just how deep the inevitable recession will prove to be, and just how long its lasts.

-GDP forecasts plunge
-Australians have not had to deal with a recession for 29 years, hence some never
-Restrictions cannot be lifted prematurely
-When it’s all over, it will be a strange new world

By Greg Peel

As of the close of Tuesday’s trade, the ASX200 had recovered 17% from the intraday low set on Monday, March 23. From the intraday high set on February 21 to that intraday low, the index fell -38.5%. Noting that percentage falls are measured from the top down, and gains from the bottom up, a fall of -38.5% requires a recovery of 61.6% to return to the starting point.

Throughout this crisis it has been assumed that the bounce, whenever it comes, will be short and sharp. The reasons being (a) the drop to -38% down was the steepest in history and (b) the bear market is due to an exogenous shock with a foreseeable end, not a boom-bust cyclical downturn.

Of course, the “foreseeable end” remains the swing factor. How soon the world passes peak-virus will determine just how long the inevitable recession, which we are clearly now in despite technically requiring two quarters of data to prove it, will last. When the world first accepted the virus as a crisis, the assumption was one quarter of economic damage. As the case-count grew in both quantum and spread, that became two quarters. The jury is currently still out on whether it may bleed into three quarters.

Which means despite a 17% bounce looking pretty definitive, there is no guarantee the bottom has now been seen. While a recession typically marks the end of a bear market, not the beginning, the recession is when reality bites.

In technical terms (two negative quarters) the last recession in Australia began in the September quarter of 1990 and lasted until the September quarter of 1991 – five quarters. Given stock markets are forward looking, Australia’s stock market index (All Ords back then) bottomed in January 1991 but rolled over again into another bear market in 1992, until seriously marking a bottom and surging to 1994, when another -20% correction ensued.

Having worked through that period myself, in the stock market, I was surprised to revise my history and find the recession ended in 1991. If you’d asked me, I would have said 1994. It certainly felt like it at the time. Of course, “recession” is a technical term, not a description of sentiment.

On the assumption you would have had to have been an “adult” at the time to feel the impact of the recession, and assuming an “adult” is 18-plus, you’d have to be 47 today to have any experience of a recession in this country. That means a helluva lot of Australians don’t know what they’re in for. And moreover, nor does the bulk of today’s financial market workforce.

Of course, things are different this time. Yes I know, it’s the kiss-of-death statement, but consider the following:

Keating called the 90s recession “the recession we had to have”. Morrison is throwing everything the government has at it.

In September 1990 the RBA cash rate was 14%. Choke on that millennials, then give me an “Okay Boomer”. Today the RBA cash rate is effectively less than zero, if we add QE-style measures to 0.25%.

By September 1991 the RBA had cut to 9.5%, and in July 1994 the rate bottomed out at 4.75%. We might call that recession chasing. Before this current recession had begun, the RBA threw everything it had at it.

In 1990 there was no option to work from home. When you lost your job last time, you lost your job. End of story.

I don’t recall, in the '90s, there ever being a shortage of toilet paper.

And of course this recession will be different, if not unique in our time, for being brought about by a virus and not previous economic excesses.

In 2008, most Australian bank analysts made the glaring error of suggesting “banks are defensive” in economic downturns. The problem was their experience, and five-year average data, only went back to the 2000-2002 downturn, which wasn’t even a recession. By the time the banks had seen around -80% of their market caps wiped out, and were desperately raising capital, only then did the penny drop for said bank analysts.

How will experience inform today’s analysis?

To be fair to stock analysts generally, 2008-09 did not result in an almost blanket withdrawal of corporate guidance, as has been the case in Australia in the last two weeks in particular. Companies did not shut down in the GFC, unless they went bust.

While broker analysis is independent, it is heavy reliant on “guidance” as the guide to earnings forecasts. Often analysts will call guidance “ambitious” on the one hand or conservative on the other, but rest assured, a change in guidance almost invariably results in a change in analyst forecasts.

Without guidance, analysts currently are, by their own admission in many cases, just as in the dark as everyone else, as they sit in their lounge rooms. Economists now begin their reports with “I’m no medical expert, but…” No one can be held accountable for current forecasts.

Which is to a great extent informing updated recession predictions.

We also have to give analysts and economists some grace for the sheer speed of this crisis and the subsequent speed of response. Less than a month ago, Morrison was off to the footy. Today, only he and Frydenberg can publicly gather, not one person more.

Analysis takes time. Reports have to be written, sub-edited, complied and published. By the time they hit the market, the world has moved on to a new phase.

So with all of the above as a caveat of sorts, here we go…

Major Contraction

Longview Economics forecasts a -5% fall in US GDP for the year 2020, from 2.3% growth in 2019, followed by a 3% recovery in 2021.

For China, -2.0% in 2020, down from 6.0%, followed by +5.2%.

For Germany, -8%, down from 0.6%, followed by +1.5%.

For Australia, -6%, down from 2.2%, followed by +4.5%.

Looking at quarterly forecasts for the US, Morgan Stanley is (as at last week) assuming -2.4% for the March quarter (year on year), followed by a record-breaking -30% plunge in the June quarter.

On an annual basis, Morgan Stanley forecasts -2.3% from 2020, followed by a 3.3% recovery in 2021.

The broker expects the US to have lost -700,000 jobs in March (non-farm payrolls) and unemployment to rise to 12.8% in the June quarter. Real personal consumption expenditure in the June quarter will drop by -31% (year on year) on Morgan Stanley’s estimates.

Morgan Stanley expects global growth to dip to 0.9% in 2020, the lowest level since 2009’s -0.5%.

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