In the U.S. nearly one-fifth of the nonessential workforce has been hit by a lockdown that is in place to check the spread of the novel Coronavirus, according to Moody’s Analytics. The situation is far worse than during the time after 9/11. Businesses excepting airlines resumed operations in a few days. The situation is more or less similar in other parts of the world afflicted by Covid-19.
There’s more bad news. More financial pain is on the way as businesses curtail investment and savings evaporate of people across the world. U.S. businesses have already started lay-offs, spiking unemployment levels. “Millions of job losses are likely in the coming weeks, particularly for households that live paycheck to paycheck,” says the report titled “Covid-19: Global Economic Tsunami.”
The stock market collapse will also have a strong negative wealth effect—the change in consumer spending in response to loss of wealth. “If sustained the loss of stock wealth will itself reduce the GDP over the coming years by an estimated 2% in the US,” adds the report. Moreover, lockdowns have already cost the US economy nearly a percentage point this year.
Even while drawing a baseline growth project for the globe under the pandemic for 2020, the Moody’s analytical team points out that it is struggling with three critical known unknowns: the trajectory of the virus, the policy response and what other problems may develop due to extraordinary pressure on the economy and financial system. “Numerous and far darker economic scenarios are possible depending on how these and other unknown unknowns play out,” says the report.
So what are Moody’s Analytics current baseline projections under the known unknowns? While the U.S. is likely to see a contraction in its gross domestic product to 0.5% in 2020, global growth too will contract to 0.4%. The Eurozone, which was already fragile and had recovered only recently and had returned to full employment, is likely to see its growth contract to 2.7% and China growing by 1.7%. The economies of Brazil and the U.K. will see their economies contract by 1.6% and 1.3% respectively.
“Europe will be especially hard hit since it has not been able to contain the spread of the virus… and emerging economies will be hammered given the collapse in oil and other commodity prices, which are stables for many Latin American, Middle Eastern and African economies,” argues Zandi.
With a sharp slowdown in discretionary spending, there will be a pullback in business investment and thereby dampening any hope of an early recovery from the recessionary forces. The investment mood had already been rather despondent over concerns about U.S.-China trade war, the fallout of a messy Brexit and a long list of other geopolitical concerns. “Investments in the energy industry is already falling because of the collapse of oil prices,” says Zandi.
Then there are other financial fault lines that can make the outlook bleaker for the economy. Impairment of liquidity in credit markets, including those in repo and commercial paper, could have a damaging impact. “If the 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,” says Zandi.
Similarly, the high level of corporate debt of many multinationals and other companies is another threat to the global economy. Smaller companies with highly leveraged balance sheets will face a Hobson’s choice: Make their debt payments in a timely way or cut pay rolls and investment in these trying times. Either way, it is not good for the economy.
Global central banks and governments have responded promptly. The former have cut interest rates and announced quantitative easing to give substantial liquidity to financial markets. Governments across the world have declared state of emergency and earmarked funds to address the health crisis, and are providing discretionary fiscal stimulus that includes more government spending and tax cuts. But whether those measures would be enough to take care of the known unknowns is the real unknown.