The global economy likely rebounded sharply from the coronavirus crisis in the third quarter, with many economies posting record growth rates after contracting in the second quarter, but the momentum has started to fade, and credit conditions are pointing to a K-shaped recovery, S&P Global Ratings said in two reports published Oct. 6.
S&P Global Ratings said better-than-expected bounces were seen in the U.S and the eurozone due to higher consumer spending, and also in China where the government increased its infrastructure spending. The recovery in emerging markets is moving at different paces, with some economies likely suffering large permanent income losses.
The rating agency warned that the next round of economic recovery will be "more difficult" as countries grapple with slowing growth momentum and fiscal challenges.
"While the rebound is certainly welcome, we don't believe it's a reason to celebrate. Economic activity remains well below the levels recorded at the end of 2019," S&P Global Chief Economist Paul Gruenwald wrote in the report.
Gruenwald said it would take several more quarters, or years in some cases, before economic activity returns to pre-pandemic levels. "Even then, the path of output is likely to be lower than before the crisis," he added.
Looking at the economic rebound by sector, S&P Global Ratings said a map of expectations from its credit experts shows "increasingly diverging trends," or a K-shaped recovery, with certain sectors not expected to fully recover in 2020 or 2021.
"Macroeconomic and credit trends point to a widening gap in credit risks across regions and industries in the year to come," said Alexandra Dimitrijevic, Global Head of Research at S&P Global Ratings, noting that sectors such as airlines, hotels and auto are unlikely to recover before 2023.
S&P Global Ratings expects global GDP to contract by 4.1% in 2020, reflecting upward revisions to its forecasts for the U.S., eurozone and China, and downward revisions for India and the U.K.
For 2020, the forecast for the U.S. economy was revised to a 4% contraction from a 5% slump due to consumer spending resilience and labor market recovery. The projected GDP downturn for the eurozone, where retail sales are now above pre-pandemic levels, was revised to 7.4% from 7.8% previously.
China's real GDP is projected to grow 2.1% in 2020, compared to a previous forecast of 1.2% expansion. The growth forecast for 2021 has been revised down to 6.9% from 7.4%.
The balance of risks to the economic outlook remain on the downside due to inadequate support for small and midsize businesses and the labor market, premature fiscal tightening, and the increasing economic toll in emerging markets, according to S&P Global Ratings.
"We believe the role of fiscal policy should be to cushion the blow, keep workers and firms staying as connected as possible, and create a bridge to the eventual recovery," said the rating agency, which also cited the need for central banks to continue their efforts in supporting the economic rebound.
"Current monetary and macro-prudential policy stances are therefore helpful and will need to continue through the COVID-19 period. But the role of creating public demand to offset the sharp drop in private demand falls squarely on fiscal policy," the rating agency added.
S&P Global Ratings said the shares of nonfinancial corporates and banks globally with negative rating outlooks are at "unprecedented highs" of 37% and 30%, respectively, indicating potential rating downgrades in the coming year.
The rating agency expects the speculative-grade corporate default rate in the U.S. to rise by June 2021 to 12.5% from 6.2%, and in Europe to 8.5% from 3.8%.