The coronavirus (Covid-19) pandemic caused a global economic tsunami, Moody’s Analytics warns, because the virus spread rapidly across countries, leading to forced localisation. According to Moody’s Analytics, China’s experience with KOVID-19 shows the devastation the disease is wreaking on the economy.
The economic tsunami that hit China and much of Asia earlier this year and Europe a few weeks ago is now overwhelming the U.S. economy as more and more parts of the country are demanding the closure of insignificant companies. This sudden economic downturn is unprecedented. The only analogy is the 9/11 attack. But it took a day or two, and apart from the airlines, the business continued, writes Mark Zandi, chief economist at Moody’s Analytics, in a recent report.
In 2020, the Agency set the global real GDP growth rate before the VIDOC pandemic at 2,6 %. With the virus crippling travel, trade and many businesses, the global economy is expected to suffer and real GDP is expected to fall by 0.4%.
According to Moody’s, the first wave of this economic tsunami is accompanied by even greater financial problems. As the number of redundancies increases, enterprises reduce their investments and evaporate the eggs in the nests of the elderly. But while central banks around the world are reacting aggressively, they also lack the dry powder to fight the crisis, as interest rates are close to zero.
Governments now have a responsibility to provide quick and full financial support to households and businesses in need. The extent of the economic damage that COVID-19 will eventually cause depends on the trajectory of the virus and the response of governments, Zandi said.
According to Moody’s Analytics, the second wave of the economic tsunami will collapse when the other half of households accept their greatly reduced prosperity. The third wave will be a sharp drop in business investment. The economy was already on the brink of a war between the United States and China, brexite, and a long list of other geopolitical problems. But the virus can tolerate too much.
The peak in corporate insolvencies and bankruptcies will undoubtedly come. This will further deepen the investment recession and become an obstacle for future economic recovery, Zandi wrote.
China and corporate debt
Among the regions, Moody’s says that Asia has gone through the worst phase of the virus, and although there is still a significant economic slowdown to come, the region’s economy should be able to achieve a slight increase in gross domestic product (GDP) by 2020. However, they believe that the Chinese economy should recover with confidence and be fully functional by the end of this year.
Our fundamental forecast for the global economy is becoming increasingly pessimistic. However, given the rapid development of events and the high degree of uncertainty about the path of the virus, the virus can be insufficiently pessimistic. There are three known critical unknowns – the trajectory of the virus, the policy response and other problems that could arise as a result of the extreme pressure on the economy and the financial system. Several much darker economic scenarios are possible, depending on how they unfold – and other unknowns, Zandie wrote.
According to Moody’s, growing corporate debt is another big problem. There are many large multinational companies with strong balance sheets and low indebtedness, but there are also many highly indebted companies that may have to choose between paying off their debts on time or reducing wages and investments. In any case, the economy will suffer, Moody warns.