By: S&P Global Ratings
This is an excerpt of a report that revises S&P Global views on the economic impact of the widening COVID-19 epidemic. It follows its Feb. 11, 2020 report “Global Credit Conditions: Coronavirus Casts Shadow Over Credit Outlook”.
The global macro outlook has taken a turn for the worse since our last update due to a step change in the spread of COVID-19. The virus has now gone global. It is no longer just an issue for China and its closest economic partners, and no longer mainly a supply chain issue. Both supply and demand effects are in play, and both are being amplified by tightening financial conditions. This cocktail greatly complicates economic analysis. Our earlier reports focused on the effects on supply chains, mainly in China and Northeast Asia. Since then, the global economic impact has broadened to include demand effects. These include tourism and discretionary consumption owing to: rising travel restrictions; wealth effects as financial markets adjust sharply; and high uncertainty that is crimping spending.
The behavior of financial markets has changed significantly since our last report. Through mid-February, markets seemed quite sanguine about the effects of COVID-19. That has all changed. Equities corrected sharply last week, with double-digit percentage declines across most major bourses. A spike in risk aversion pushed the VIX above 40, its highest level since 2015, while a flight to quality pushed safe-haven assets—high quality bonds and reserve currencies—higher as well. The U.S. 10-year and 30-year Treasury yields both hit all-time lows and the Euro gained.
The deepening of the coronavirus crisis has intensified calls for a bold, coordinated macro policy response, and the Fed and Reserve Bank of Australia both delivered rate cuts on March 3. While the normal transmission lag for monetary policy is two to four quarters, suggesting that rate cuts are not the right medicine, there is a case for immediate monetary policy action aimed at calming markets, reducing sharp risk aversion related capital flows and narrowing credit spreads out on the curve. We are likely to see more policy rate cuts elsewhere, given the space created by the Fed. We also expect country authorities to use the entire macro toolkit to combat COVID-19 related dislocations, included targeted fiscal measures to offset the more severe impacts of the slowdown.
Non-Asia emerging markets. The economic fallout on emerging markets in Latin America and Europe, Middle East, and Africa (EMEA) will be more pronounced than we initially anticipated, especially now that a growing number of confirmed cases of coronavirus are being reported in the Middle East. In emerging market EMEA, we initially viewed the impact of the virus as limited, given relatively looser economic ties with China. That has now changed. In Russia, we estimate the impact of a sharper fall in crude prices and tighter financial conditions on 2020 growth to be 0.3 ppts, although this will be somewhat offset by a planned (and unrelated to COVID-19) fiscal stimulus. In Turkey, we now estimate a 0.2 ppt drag on 2020 growth due to slower GDP expansion in key European trade partners and tighter financial conditions. A possible hit to the important tourism sector is a risk.