Key Takeaways
- As the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress, we now forecast a global recession this year, with 2020 GDP rising just 1.0%-1.5%. The risks remain firmly on the downside.
- The initial data from China suggests that its economy was hit far harder than projected, though a tentative stabilization has begun. Europe and the U.S. are following a similar path, as increasing restrictions on person-to-person contacts presage a demand collapse that will take activity sharply lower in the second quarter before a recovery begins later in the year.
- Central banks have swung into action and are undertaking some combination of sharply reduced policy rates, resumed assets purchase and liquidity injections. Fiscal authorities have generally lagged but have begun to loosen the purse strings; we suspect that larger and more targeted spending to the most affected groups is forthcoming.
Since our last update, which was on March 3, the spread of the coronavirus has accelerated, and its economic effect has worsened sharply. Economic data remains scarce, but the long-awaited initial figures from China for January and February were much worse than feared. The spread of the virus, which the World Health Organization declared to be a pandemic on March 11, appears to be stabilizing in much of Asia. However, the increasing restrictions on person-to-person contact in Europe and the U.S. have sent markets reeling as risk-aversion rises and views on economic activity, earnings, and credit quality deteriorate sharply. As a result, we now forecast a global recession this year, with annual GDP rising 1%-1.5%.
Our Assumptions
S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications. We believe measures to contain COVID-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers. As the situation evolves, we will update our assumptions and estimates accordingly.
China's first macroeconomic data capturing the effects of COVID-19 was much worse than expected. Industrial production in China fell a staggering 12.3% in January-February compared with the same period last year, four times the consensus forecast decline. Moreover, while assumptions around the peak timing of the virus turned out to be broadly valid, the projections around the path of the rebound now look optimistic. Risks of secondary infections are slowing the lifting of person-to-person restrictions, meaning the recovery is likely to be more drawn out than previously thought.
Restrictions on movement in Europe and the U.S. are putting a severe dent in economic activity. COVID-19 is affecting all aspects of life. Travel is being curtailed, with passenger counts down sharply. Schools are being closed. Mass gatherings such as sports events and theater are being postponed, with knock-on effects on related hospitality industries (see chart). Offices and factories are being shuttered as companies move to remote work. And, most recently, cities and parts of countries are in or moving toward lockdowns, with all but basic societal functions on hold.
Financial markets have gone into freefall, and volatility has spiked to levels last seen during the global financial crisis. Equities suffered double-digit percent losses the week of March 9 as markets began to factor in the consequences of COVID-19 on growth, earnings, and credit. Day-to-day fluctuations sent the closely watched VIX measure of volatility to its highest level since the global financial crisis. Moreover, credit spreads were their widest in more than a decade, and that wasn't limited to speculative grade. Liquidity stress spread as firms and households shed risk and sought high-quality, liquid assets. 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.
Central banks have responded with increasingly aggressive actions. In an extraordinary meeting on Sunday, March 15, the U.S. Federal Reserve slashed its benchmark interest rate to effectively zero. It also moved to ensure financial-system liquidity, increasing its holdings of Treasuries and mortgage-backed securities, and expanded repo operations. The Fed and five other central banks announced an agreement to ensure dollar liquidity through the use of swap lines. Central banks in the U.K., Canada, and New Zealand cut policy rates in recent days as well, and the European Central Bank announced additional asset purchases and more long-term financing operations (but no policy rate cut).
As a result, we now forecast a global recession in 2020, with global GDP rising just 1.0%-1.5% in the full year.
- China. Although the health situation there has stabilized, much of the economic damage has already been done. We now project growth of 2.7%-3.2% for 2020, with a flat second quarter and a recovery starting in the second half. Chinese authorities don't appear to be planning a big fiscal stimulus, though targeting spending will continue, and the People's Bank of China will intervene to keep liquidity flowing.
- Eurozone. The virus continues to spread, and an increasing portion of the Eurozone population remains at or near lockdown. Tourism and investment have been the hardest-hit areas so far. We now expect the eurozone economy to contract 0.5%-1.0% this year. COVID-19 will affect first-quarter data (when we expect contraction) somewhat, but we believe the more significant hit will be in the second quarter, with a modest recovery to follow. The European Central Bank seems unlikely to lower policy rates much, but it will use cheap long-term refinancing operations (LTROs) and targeted LTROs to smooth the operation of the financial sector. We also expect stepped-up EU-level fiscal efforts to support the hardest-hit firms and populations.
- U.S. The impact of COVID-19 in the U.S. has escalated rapidly, with restrictions following Europe with a shortening lag. The sectoral hits should be similar, with the key addition of the oil and gas sector, given the plunge in global prices. Owing to the strong start to the year and the lag in many key metrics, it looks like the U.S. will post marginally negative growth in the first quarter, with the big hit coming in the second quarter (a seasonally adjusted, annualized contraction of about 6%) before recovery begins in the second half of the year. The Fed has already acted, and its intentions are clear. We expect short-term, targeted fiscal stimulus at the federal level soon.
Revised 2020 GDP Growth Forecasts (%) | ||||||
---|---|---|---|---|---|---|
High base | Low base | |||||
U.S. | 0.0 | (0.5) | ||||
Eurozone | (0.5) | (1.0) | ||||
China | 3.2 | 2.7 | ||||
Rest of the world | 1.9 | 1.4 | ||||
Global (PPP weights) | 1.5 | 1.0 | ||||
Source: S&P Global Economics. |
- Emerging markets (EMs) are a mixed bag, and how hard they will be hit will largely reflect capital flow and commodity dependency. EMs with external imbalances--running current account deficits financed by portfolio flows (such as Indonesia, Mexico, and South Africa)--are especially at risk, as are those with a high stock of external debt (for example, Turkey) and oil exporters (including Gulf countries, Russia, and Colombia). That said, oil importers--including most of EM Asia--should benefit.
The risks to our revised baseline remain firmly on the downside. There are several things to consider:
- As the early data from China has demonstrated, growing restrictions on person-to-person contact will affect economic activity. There are no empirical rules to estimate how this social distancing could affect key economic variables.
- While monetary policymakers continue to ramp up their actions, financial conditions continue to tighten for most market participants. Moving policy variables with indirect effects on outcome might need to be replaced by more direct measures.
- 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.
- It is difficult to measure how much output will be permanently lost as a result of COVID-19. While the focus now is rightly on containing the virus and measuring its downside effects, the strength of the eventual recovery will depend crucially on how much output can be replaced.
We will continue to monitor developments and update our forecasts as necessary.
Related Research
- COVID-19 Credit Update: The Sudden Economic Stop Will Bring Intense Credit Pressure, March 17, 2020
The views expressed here are the independent opinions of S&P Global's economics group, which is separate from, but provides forecasts and other input to, S&P Global Ratings' analysts. The economic views herein may be incorporated into S&P Global Ratings' credit ratings; however, credit ratings are determined and assigned by ratings committees, exercising analytical judgment in accordance with S&P Global Ratings' publicly available methodologies.
This report does not constitute a rating action.
Global Chief Economist: | Paul F Gruenwald, New York (1) 212-438-1710; paul.gruenwald@spglobal.com |
Secondary Contacts: | Beth Ann Bovino, New York (1) 212-438-1652; bethann.bovino@spglobal.com |
Sylvain Broyer, Frankfurt (49) 69-33-999-156; sylvain.broyer@spglobal.com | |
Tatiana Lysenko, Paris (33) 1-4420-6748; tatiana.lysenko@spglobal.com | |
Shaun Roache, Singapore (65) 6597-6137; shaun.roache@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.