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The pace of recovery over the next 18 months will define the US economic outlook over the next 3-5 years. Morgan Stanley outlines four scenarios for life after COVID.

Key quotes

“Base Case: Navigating a New Normal. A vaccine arrives in the spring of 2021, following a second wave of rising infection rates and business tightening in the fall of 2020. Real GDP returns to pre-COVID levels by the end of 2021 but with subdued near-term productivity growth, lower capital expenditures from businesses and higher unemployment levels through 2025. In this case, consumers could remain cautious with wallets, resulting in an elevated savings rate of 10% and subdued spending habits. One area where spending could pick up is housing.”

“Base Case +: Getting Back to Normal. A slightly more positive scenario, compared to the base case, assumes a viable vaccine in the spring of 2021 but without a severe outbreak in the fall and, consequently, less risk aversion among consumers and businesses. Productivity would pick up and help bring GDP growth closer to 2%, enabling growth to resume pre-COVID levels by 2025.”

“Bull Case: Riding a Robust Recovery. A vaccine arrives well before the spring of 2021, and low-risk aversion among consumers and businesses brings a swift return to life as normal. All told, life after COVID wouldn’t be materially different than before the pandemic. Bull-case outlook pegs average GDP growth at 2.4% through 2025. This optimistic outlook has unemployment levels falling back to 3.5%, saving levels drifting down to 7.3% and inflation rising 2.5%. Notably, this scenario could double productivity growth to as high as 2%, thanks to greater workforce engagement and technology improvements.”

“Bear Case: Dealing with Deep Scars. No vaccine for two to five years. This results in a crisis of consumer confidence, a surge in savings, structurally higher unemployment and lasting economic damage. Should more unemployment become permanent, rather than temporary, the effects on the labor market can be significant over time.”