In an article titled “COVID-19 Macroeconomic Update: The Global Recession Is Here And Now,” our economists say they now estimate GDP growth in 2020 at just 1.0%-1.5%, with risks remaining 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,” said S&P Global’s Chief Economist Paul Gruenwald. “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.”
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.
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.
The risks to our revised baseline remain firmly on the downside. There are several things to consider, according to Mr. Gruenwald:
- 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.