Photo: Bloomberg
Photo: Bloomberg

Coronavirus outbreak is like an economic tsunami: Moody’s

  • Moody’s has pared down India’s GDP forecast twice within a month to 5.3% for 2020
  • Emerging economies will be hammered given the collapse in oil and other commodity prices

Holding that coronavirus (COVID-19) has engulfed the global economy in a serious downturn like an “economic tsunami", Moody’s Analytics on Tuesday said the extent of economic damage caused by the pandemic will ultimately depend on the trajectory of the virus and how quickly governments respond.

“Our darkening outlook for the global economy is struggling to keep up with the growing magnitude of the crisis. We have long been wary of the economy’s growth prospects this year and the threats to that growth, but COVID-19 has resulted in consistent substantial downgrades to the outlook," Moody’s said.

In January, prior to the COVID-19 outbreak, it expected global GDP to grow at 2.6% in 2020. With the virus now shutting down travel, trade and many businesses, it now expects the global economy to contract by 0.4%.

“While our baseline outlook has also turned quickly more pessimistic, the recession that now engulfs the world ultimately should not be as severe as the financial crisis nor, certainly, as terrible as the 1930s’ Great Depression. However, the scenario that comes to pass will depend critically on how effective global policymakers are in containing the virus and responding to the economic fallout," it said striking an optimistic note.

Moody’s said emerging economies will be hammered given the collapse in oil and other commodity prices, which are staples for many Latin American, Middle Eastern and African economies. However, it said Asia’s economy should be able to eke out a small gain in GDP this year.

“After cratering in the first quarter, China’s economy is staging a strong comeback. Barring a return of the virus, China should be fully up and running later this year. Of course, with global travel still largely shut down and the global economy struggling to revive, the Asian economy will not get into full gear until next year. The ability of Asian governments to quickly and effectively lock down their infected populations has allowed them to restart their economies more quickly and to limit the damage to the region’s longer-term growth prospects," it added.

Moody’s has pared down India’s GDP forecast twice within a month to 5.3% for 2020, saying an extensive and prolonged slump as a result of the COVID-19 outbreak will reduce growth in Asia’s third-largest economy.

Europe will be especially hard-hit since it has been unable to contain the spread of the virus, Moody’s said. “The European economy was fragile before the virus hit—it returned only recently to full employment after a decade-long struggle in the wake of the financial crisis. Europe is also struggling to muster an economic policy response. The Bank of England recently lowered rates to the zero lower bound and the European Central Bank has maintained negative rates since the crisis. Germany and the U.K. are implementing large fiscal stimulus packages, but the rest of Europe has little fiscal space to respond. Euro zone real GDP is expected to decline by nearly 3% in 2020," it added.

Moody’s said the US economy will also suffer significantly with the lockdowns already shaving off nearly a percentage point of GDP, and the losses are mounting rapidly. “US real GDP is expected to decline by nearly half a percentage point this year. A massive and mounting monetary and fiscal policy response will limit the economic damage compared with much of the rest of the world. The Federal Reserve’s aggressive actions should stabilize credit and equity markets, and we expect lawmakers to ultimately provide $1.65 trillion in discretionary fiscal stimulus—deficit-financed increases in government spending and tax cuts—equal to nearly 8% of GDP. Even so, US real GDP will decline," it added.

My Reads Logout