S&P Global Forecasts Global Recession Due to Coronavirus

China is a barometer for what the rest of the world can expect in the downturn, firm says.

A global recession will occur later this year, S&P Global forecasts, citing a drought in demand caused by mandatory stay-at-home provisions due to the novel coronavirus as a significant factor lending to the downturn.

“Restrictions on movement in Europe and the US are putting a severe dent in economy activity. COVID-19 is affecting all aspects of life,” the company wrote in its report. “We now forecast a global recession this year, with annual GDP rising 1% to 1.5%.”

S&P turned to the relatively mature Chinese market, which has been dealing with the impact of the virus for a bit longer than the rest of the world. According to recently reported economic data for January and February, the decline in Chinese industrial output was devastating compared to projections, underperforming projections by a magnitude of four.

“Economic data remains scarce, but the long-awaited initial figures from China for January and February were much worse than feared,” the company said, “four times the consensus forecast decline.”

There’s a compendium of economic data that points to a recession, the company asserts, citing the VIX Index reaching its highest measures of volatility since the global financial crisis, credit spreads stretching to their widest ranges in nearly a decade, and an accelerating international demand for liquidity. This is on top of the equity market’s consistent double-digit free fall.

“All of this was made worse by the collapse in global oil prices, with prices falling below $30 per barrel as major producers failed to agree on supply cuts to support the market,” the company said.

Hedge fund magnate Ray Dalio recently predicted that US corporations will experience $4 trillion in economic losses related to the virus. 

“What’s happening has not happened in our lifetime before,” Dalio told CNBC. “There’s a need for the government to spend more money, a lot more money.” A stimulus package estimated between $1 trillion to $2 trillion is being negotiated in Congress and has yet to garner clear bipartisan support.

IHS Markit, a London-based research firm, predicted that a global economic downturn will begin in the second quarter of 2020 and last through the end of the year, springing back in early 2021. By the end of the second quarter, the drop in GDP will total 5.4% annualized, the firm’s chief US economist Joel Prakken said.

S&P will continue to use China as a gauge in determining what the American economy can look like in the later stages of country’s grapple with COVID-19. “We now have China as a model for how the virus’ spread could stabilize and society could begin to return to normal. As China has shown, restrictions could be lifted more slowly than originally thought as public health concerns persist.” The company projects growth of 2.7% to 3.2% for China in 2020, with a muted second quarter and a recovery branching out in the second half.

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