Morgan Stanley says its 'biggest fear' for the coming recession is that policymakers repeat the mistakes they made after the 2008 financial crisis

• Analysts at Morgan Stanley believe that the current downturn will be worse than the global financial crisis.
• "Our biggest fear is that 2021 repeats the mistakes of 2010," the team of analysts said in a note published Wednesday, regarding fiscal tightening measures implemented post the financial crisis.
• Asking people to continue social distancing in May when new cases are declining and economic pain is mounting will be a harder challenge, the analysts said.
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Analysts at Morgan Stanley believe that the imminent 2020 recession will be more severe than the global financial crisis.

However, they expect output in developed markets to recover about twice as fast as post-crisis, given that global fiscal and monetary response has been unprecedented.

"We think the worst of forced selling is behind us," the analysts said in a note published Wednesday, indicating this to be a factor that supports low volatility and tighter spreads for traders.

The note mentioned that central bank-buying is "off the charts" dramatically improving the supply-demand for "spread product" - or the gap between bid and ask prices for a security.

"Our biggest fear is that 2021 repeats the mistakes of 2010", the analysts said, with regard to the fiscal tightening measures implemented post the financial crisis, involving tax cuts and extended unemployment insurance.

The team advised clients that volatile markets are a good time to return to basics, even though the current public health crisis has driven levels of volatility exceeding the great depression.

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The analysts were broadly bullish, saying that the investment outlook going forward is positive, especially for "buying global credit and selling volatility."

In the near term, analysts said, the second quarter of 2020 will be the worst quarter for US and global growth in "any investor's lifetime."

"The Great Covid-19 Recession (GCR) will be one of the fastest declines in economic output in history," they said.

According to the analysts, the two factors that will drive faster recovery relative to the 2008 crisis are:

1. The consumer and financial system are less leveraged heading into the market downturn than pre-2008.
2. The fiscal and monetary response is much larger and faster in deployment compared to the global financial crisis.

The team predicted that the Fed's balance sheet expansion will be about $4.5 trillion or higher in this cycle, compared to $1.3 trillion during the financial crisis.

Acknowledging that social distancing measures in February and March were 'easy' to follow, the analysts believe it would be a bigger ask later on.

It would be a harder challenge to face while asking people to extend distancing measures in May when new cases will likely be declining and the weather is better.

The team's biggest worry for 2021 is a repetition of the 2010 to 2012 experience of "more calls for austerity."

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