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Things will get worse, indicates the latest report by Moody’s Analytics on the economic shock of the global coronavirus (COVID-19) pandemic.
“Millions of job losses are likely in the coming weeks, particularly for households that live paycheque to paycheque,” Moody's Analytics' Chief Economist Mark Zandi said.
“COVID-19 has created a worldwide economic tsunami. The global economy is engulfed in a serious downturn. The virus has caused significant parts of the Asian and now European and US economies to all but shut down. More financial pain is quickly coming as layoffs mount, businesses curtail investment, and retirement nest eggs evaporate,” he added.
In January Moody’s Analytics expected global real gross domestic product (GDP) growth of 2.6 percent in 2020, which they now expect to fall by 0.4 percent. For China, in particular, GDP decline is expected by 27 percent at an annualised rate in Q1.
On the jobs front, businesses in the United States have laid-off workers and initial claims for unemployment insurance spiked to 280,000 in the second week of March compared to 210,000 in the week prior. US claims of 240,000 per week are consistent with no job growth, it noted.
“Central banks have responded aggressively but are running out of room to maneuver as interest rates hit the zero lower bound. The onus is now on governments to quickly provide substantial financial support to hard-pressed households and businesses. How much economic damage COVID-19 ultimately does will depend on the trajectory of the virus—and how governments respond,” Zandi added.
A massive and mounting monetary and fiscal policy response will limit the economic damage in the US compared with much of the rest of the world, and Moody’s Analytics expects US lawmakers to provide $1.65 trillion in discretionary fiscal stimulus.
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 UK 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 percent in 2020,” it said, adding that emerging economies will be hammered given the collapse in oil and other commodity prices.
“Our baseline outlook for the global economy is increasingly pessimistic. Still, given how quickly events are moving and the high degree of uncertainty around the virus’ path, it may not be pessimistic enough,” Zandi added.
The report identifies three ‘critical unknowns’ that are crucial to understand and respond to the problem — the trajectory of the virus, the policy response, and what other problems may develop due to the extraordinary pressure on the economy and financial system.
“Our baseline outlook also depends on credit markets functioning reasonably well, albeit with significant support from the Federal Reserve. Liquidity in credit markets has become increasingly impaired, including the repo and commercial paper markets. If liquidity dries up, and short-term funding markets effectively close to large corporates that issue short-term debt and financial institutions that raise funds necessary for their own lending, the impact on the economy will be severe and immediate,” he added.
The high level of corporate debt is another threat, Zandi noted, adding that there are many large multinationals with strong balance sheets and little debt, but there are also many highly leveraged companies that will likely face a Hobson’s choice: make their debt payments in a timely way or cut payrolls and investment.
“Either way the economy will suffer. We assume these financial fault lines are not severe or persistent enough to materially weaken the economy. However, this is an increasingly tough assumption to make,” he stated.