Global economy continues to slide as coronavirus outbreak worsens; uncertainty will remain for at least several months: Moody's

New York: The rapid spread of the coronavirus in the last two weeks, widespread business closures and unprecedented restrictions on social interactions will result in a permanent hit to global economic activity this year, according to Moody’s Investors Service. A sharp contraction of the global economy, at least in the second quarter, appears imminent, it said in its latest special series ‘Credit Risks in Turbulent Times.’ Uncertainty will remain for at least several months as to how long it will take to contain the spread of the virus and how businesses and households will cope with the resulting financial losses. Financial market volatility is at levels that last occurred during the global financial crisis, said Moody’s. “And fear about the huge hit to business activity is contributing to extreme risk-off sentiment, resulting in the repricing of equities, commodities, bonds and currencies.” [caption id=“attachment_3157190” align=“alignleft” width=“380”] Representational image. Reuters[/caption] On the real economy side, recently released data from China offers a glimpse into the impact of the unfolding consumption shock. The official data suggests a sharp contraction relative to last year in retail sales (minus 20.5 percent), industrial production (minus 13.5 percent), fixed asset investment (minus 24.5 percent) and job losses (5 million) in January and February. Outside Asia, evidence of costs to the real economy is becoming evident in Italy, France, Germany, Spain, Britain and the United States. “As business grinds to a halt, big and small firms are starting to lay off workers temporarily in an attempt to cut costs,” said Moody’s. The short-term economic costs are likely to be steep the world over. In advanced and emerging market countries alike, closures are crippling both the traded and non-traded sectors of the real economy. Moody’s said the long-term consequences will depend not only on the depth and duration of the hit to economic output but on whether it will cause lasting damage to balance sheets of households and businesses. Without policy support, many businesses that depend on a constant stream of revenue will close and lay off their workers. “While the shock could disrupt many sectors, the burden will weigh disproportionately on the transportation sector, the energy industry, hospitality, healthcare and consumer services, especially hotels, restaurants and leisure. In the worst case, entire industries could be destroyed,” it added. The detrimental effects will likely be more acute in some regions than others, not only because of the differences in the trajectory of infections and in measures to limit the spread but also because of the geographical concentration of certain industries. The demand shock from consumers scaling back spending is bound to be severe, said Moody’s, resulting in outright loss of economic output. Much of this loss will be permanent. In particular, the loss of service sector output will be unrecoverable for the most part. And even in the manufacturing sector, the damage from production shutdowns, even if temporary, will not be fully recovered. The sudden and sharp increase in risk aversion, fed by a fear that economic activity will be severely curtailed for months, has the potential to propel a self-fulfilling vicious cycle of deteriorating confidence, weak earnings expectations, lower business investment, retrenchment in employment and a further pullback in consumer spending. As a result, GDP growth will be permanently lower. “We continue to monitor and evaluate policy announcements from G-20 countries and expect to adjust our GDP forecasts over the coming weeks as the extent and nature of policy support in individual countries become evident.” Emerging market currencies have sharply depreciated vis-a-vis the US dollar because of safe-haven flows. Emerging market economies will remain vulnerable to heightened volatility of cross-border capital flows over the next few years. Moody’s said oil-producing countries and regions will experience much higher stress if oil prices remain around 30 dollars per barrel over an extended period. As production grounds to a halt in more countries, non-oil commodities are also likely to decline. A key difference in the policy response during the global financial crisis and now is that policymakers today are deploying emergency relief packages pre-emptively in an effort to limit the economic damage. Since the financial crisis, processes and tools to deploy largescale stimulus quickly have been put in place. Moreover, the continuous assessment of the health of the financial and non-financial sectors over the last decade in all major economies, and the availability of data, should in theory help calibrate the policy response to address vulnerabilities where they exist. “It is likely therefore that the early deployment of countercyclical measures will help contain long-term damage. We will continue to assess the steady buildup of policy actions as well as private sector outcomes as we evaluate the global economy in the coming months.”