Morgan wary on COVID-19 recovery timeline

Former Westpac boss David Morgan is bearish about recovery prospects from the COVID-19 crisis, saying the IMF forecasts are too ­optimistic.

Former Westpac chief executive David Morgan Picture: Richard Dobson

Former Westpac chief executive David Morgan is bearish about recovery prospects from the COVID-19 crisis, saying the International Monetary Fund’s baseline forecasts are too ­optimistic.

In a report published by Firstlinks, a Morningstar company, Dr Morgan notes that the IMF has predicted a 3 per cent contraction in global output in 2020, or 6 per cent for advanced economies — much worse than the global financial crisis when global output was broadly flat.

He says this is too optimistic, mainly because of adverse developments since the forecast was finalised on April 7.

Also, there were other factors to consider, such as global supply chains becoming “more local, less global and more robust”.

“The costs and benefits of globalisation will be reassessed, with a move back in the direction of economic nationalism,” Dr Morgan, chairman of Chi-X Australia and JC Flowers & Co operating partner, says.

“This will take time, involve disruption, and lower economic growth.”

Digitisation and automation of work would also accelerate, permanently erasing jobs in people-intensive industries such as retail. Many retail stores would not reopen, and a lot of low and medium-skill service jobs would not return.

Finally, risk aversion would come to the fore in business, and particularly in households.

“There will be a major flight to safety, much lower consumption, more saving, and reduction of extremely high private non-financial sector debt loads,” Dr Morgan says. “Companies in particular will see the crisis as a once-in-a-generation opportunity to put through huge cost cuts deemed too draconian in more normal times — the move to remote working during this crisis has provided a great opportunity to see much of what people actually do and who is truly vital to the ­institution.

“There are very large numbers who will not be retained.”

Dr Morgan also sounded a warning about the implications of record levels of public debt incurred by governments and central banks, which could “spook” markets. Any increase in sovereign borrowing costs, or the fear of it materialising, could prevent many countries from continuing the income support assumed in the IMF forecasts.

Some countries could turn to their central banks to directly finance government spending, undermining central bank independence. “Indeed, there is a not implausible case that in some countries that Rubicon has already been crossed (notably but not only in Japan),” he says.