There will be “an unprecedented shock” among the Group of 20 (G20) economies in the first half of this year as a result of the COVID-19 pandemic, according to Moody’s Investors Service, which now expects real gross domestic product (GDP) for the countries to contract 0.5% this year. Prior to the outbreak, Moody’s economic outlook called for the global economy to grow 2.6% this year.
“We have revised our global growth forecasts downward for 2020 as the rising economic costs of the coronavirus shock, particularly in advanced economies, and the policy responses to combat the downturn are becoming clearer,” Moody’s said in its most recent outlook.
The firm forecasts that business activity will fall sharply across the world’s advanced economies and projects cumulative contraction of 4.3% in the US, 5.4% in Germany, 4.5% in Italy, 3.9% in the UK, and 3.5% in France for the first two quarters of the year. And while it expects fiscal and monetary policy measures will likely help the economies recover in the latter half of the year and in 2021, it said the output lost in the second quarter will likely never be recovered.
“Our forecasts reflect the severe curtailment of economic activity in recent days as the coronavirus has spread throughout the world,” Moody’s said. “Financial sector volatility has exploded to levels last seen during the 2008 global financial stress, despite the expectation of rapid policy response from major central banks and governments.”
Moody’s said the financial market stress is a reflection of deep anxiety and uncertainty around the real economic costs that households and businesses around the world will face. It also said the severe compression in demand over the next two to four months will likely be unprecedented. It noted that purchasing managers’ index (PMI) indicators for the eurozone area confirm a sharp contraction is already underway.
According to data and information provider IHS Markit, the eurozone economy suffered “an unprecedented collapse” in business activity in March as the coronavirus outbreak intensified throughout the continent. The “flash” IHS Markit Eurozone Composite PMI plummeted to 31.4 in March from 51.6 in February, which was the largest monthly decline in business activity since comparable data were first collected in July 1998, falling well below the previous record low of 36.2 that was recorded in February 2009.
Moody’s now expects real GDP growth in China to be 3.3% in 2020, followed by 6% growth in 2021. However, it said, slow improvement in consumer demand will hinder the pace of its recovery. It also said the recovery in other emerging markets will likely be relatively more subdued than in advanced economies.
“A general lack of social safety nets, a weaker ability to provide adequate support to businesses and households, and inherent weaknesses in many of the major emerging market countries will amplify the impact of the shock,” Moody’s said.
Additionally, the loss of income for businesses and individuals across the world will have “a multiplier effect” throughout the global economy as job losses will likely rise globally over the next few months. It said the speed of the recovery will depend on to what extent job losses and loss of revenue to businesses are permanent or temporary. Moody’s said that even in countries where governments are in a position to provide support through large and targeted measures, some small businesses and vulnerable workers in less-stable jobs will likely experience severe financial distress.
“It is impossible to accurately estimate the economic toll of this crisis,” Moody’s said. “There are significant unknowns, such as how long the virus will take to be fully contained and, by extension, how long economic activity will remain disrupted.”
The firm also warned of the possibility of a resurgence in new COVID-19 cases in countries after they lift travel restrictions and social distancing measures, which would result in longer stretches of restrictive measures.
“The risks to our baseline forecasts remain firmly to the downside,” Moody’s said. “In particular, a sustained pullback in consumption and prolonged closures of businesses would hurt earnings, drive layoffs, and weigh on sentiment. The longer these conditions persist, the more they would potentially feed self-sustaining recessionary dynamics.”