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Global Macroeconomic Update, March 24: A Massive Hit To World Economic Growth

NEW YORK (S&P Global Ratings) March 24, 2020--It's now clear that the hit to global economic activity from the measures to slow the spread of the coronavirus pandemic will be massive. Indeed, analysts in the financial and official sectors are revising their estimates of global GDP growth for the first half of 2020 on a near-daily basis. Whether these new forecasts imply a corresponding large downward revision in annual GDP growth depends critically on governments' policy response--particularly fiscal policy.

As more data come in on the effects of stay-in-place and other coronavirus-containment measures, there is a growing downside risk to S&P Global Ratings' forecasts, even from just one week ago:

  • For the U.S., the decline in GDP in the second quarter now looks to be at least double the 6% contraction we estimated last week, and we now expect a contraction in the first quarter as well.
  • Europe's GDP decline for the first half of the year looks to be similar to the U.S.'s--but with a somewhat larger decline in the first quarter than the second because the shock started earlier there.
  • In contrast, the spread of the virus appears largely contained in China, and its economy seems to be stabilizing. Anecdotal evidence--such as traffic patterns and shipping data--as well as official figures show that economic activity is beginning to recover, albeit at a slower rate than originally expected. We estimate China's GDP contracted 13% (annualized) in the first quarter but should begin to grow again in the second quarter.
  • Emerging markets such as Brazil, India, and Mexico were the last group globally to be hit by the pandemic, and so we have less data to draw from. But we now expect a similar shock to those countries, with possible double-digit percent GDP declines in the second quarter.

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 (see our macroeconomic and credit updates here: As the situation evolves, we will update our assumptions and estimates accordingly.

Given the growing size of the demand shock and the corresponding potential dislocation to production and labor markets, governments' policy response is critical. In our view, the objective should be to cushion the effects of the sharp decline in growth and lay the groundwork for recovery. The less dislocation to the real economy now, the faster a rebound can take hold, and the less economic activity will be permanently lost. The focus of policymakers and the public has rightly shifted to fiscal policy.

Monetary policy's goal of keeping markets functioning as well as possible is well understood in the current environment, and we continue to expect a plethora of new facilities to ensure liquidity and orderly financial conditions. The U.S. Federal Reserve's announcement that it would buy as much government-backed debt and commercial paper as needed to keep financial markets functioning, as well as undertaking a series of initiatives to shore up businesses, underscores this importance.

The fiscal response of the U.S. government is now front and center in the policy debate in light of the ongoing and projection sharp decline in private-sector demand. Figures approaching $2 trillion (equivalent to 10% of GDP of the world's biggest economy) of new spending are on the table.

Labor-market policy seems key because workers in the most-affected sectors are already being laid off at rapid rates. The U.S. initial jobless claims report due this Thursday could show as many as 3 million Americans filing for unemployment insurance, which would be quadruple the 1982 record. About 15% of U.S. workers (mainly in the services sectors) are at risk, and depending on the number of jobs lost, headline unemployment could reach the mid-teen percentages. Fiscal policy via direct payments or tax breaks can also help ensure that firms have incentives to keep people on the payroll (as Germany, France, and New Zealand, for example, have done) or at least have the means to pay the bills.

What does the end game look like? First, let us hope that the human suffering is minimized and that the economic recovery comes sooner rather than later. In that regard, if there is little or no permanent change to the labor force, capital stock, or productivity, which seems likely, then potential GDP growth won't change. There might be a permanent loss in output, but fiscal policy could create enough demand to largely offset the loss of private demand.

Speed seems of the essence, as is fostering a setting in which the economy--labor markets and supply chains based on small and medium-sized businesses, in particular--can get back to normal quickly once the pandemic passes. The longer it takes for governments to implement fiscal support, the more damage there'll be to the economy. Regardless, the hit to growth in the first half of the year will be worse than we thought last week.

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.

S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.

Global Chief Economist:Paul F Gruenwald, New York (1) 212-438-1710;

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