The coronavirus pandemic (Covid-19) created a global economic tsunami, warns Moody’s Analytics, given the speed with which the virus spread across countries and forced blockages. China’s experience with COVID-19, said Moody’s Analytics, demonstrates the economic devastation that the disease brings to an economy.
“The economic tsunami that hit China and much of Asia earlier this year and hit Europe a few weeks ago is slowing the US economy, as more and more regions of the country require the closure of non-core businesses. This sudden economic downturn is unprecedented. The only analog is the September 11 terrorist attack. But it lasted a day or two, and with the exception of airlines, businesses have continued to operate, “wrote Mark Zandi, chief economist at Moody’s Analytics in a recent report.
The agency had set global real GDP growth of 2.6% in 2020 before the COVID-19 pandemic. “With the virus now shutting down travel, commerce and many businesses, the global economy is expected to suffer, with real GDP dropping 0.4%.” says the agency.
More financial difficulties – the first wave of this economic tsunami – according to Moody’s, are on the way as layoffs increase, companies reduce their investments and the retirement eggs are evaporating. That said, although the world’s central banks have responded aggressively, they too lack the dry powder to fight the crisis as interest rates approach zero.
“It is now up to governments to quickly provide substantial financial support to struggling households and businesses. The amount of economic damage caused by COVID-19 will ultimately depend on the trajectory of the virus and how governments respond, “said Zandi.
The second wave of the economic tsunami, Moody’s Analytics said, will strike when the other half of households reconcile with their greatly reduced wealth. The third wave will be a sharp decline in business investment.
Businesses were already on the brink of the U.S.-China trade war, Brexit, and a long list of other geopolitical concerns. But the virus will be too heavy to carry.
“An upsurge in bankruptcies and business failures is about to happen. This will further worsen the drop in investment and hinder future economic recovery, ”wrote Zandi.
China and corporate debt
Among the regions, according to Moody’s, Asia must have gone through the worst of the virus, and although there are still considerable economic spinoffs to come, the region’s economy should be able to achieve a slight gain gross domestic product (GDP) in 2020. However, China’s economy should return to full strength and be fully operational later this year.
“Our benchmarks for the global economy are increasingly pessimistic. However, given the speed with which events are moving and the high degree of uncertainty surrounding the trajectory of the virus, this may not be sufficiently pessimistic. There are three known critical unknowns – the path of the virus, the political response and what other problems may develop due to the extraordinary pressure on the economy and the financial system. Many much darker economic scenarios are possible depending on how these – and other unknown unknowns – unfold, ”wrote Zandi.
Another key concern, according to Moody’s, is the rising level of corporate debt. “There are many large multinationals with strong balance sheets and little debt, but there are also many highly leveraged companies that will likely be faced with Hobson’s choice – make timely debt payments or cut wages and investments. Either way, the economy will suffer, ”warns Moody’s.