S&P Predicts Global Recession This Year, Warns Of Downside Risks

The global economy is set to see a recession this year due to the severe economic shock caused by the coronavirus, or Covid-19, and the risks remain on the downside, S&P Global said Tuesday.

“As the coronavirus pandemic escalates and growth heads sharply lower against a backdrop of volatile markets and growing credit stress, we now forecast a global recession this year, with 2020 GDP rising just 1.0 percent -1.5 percent,” S&P’s global chief economist Paul Gruenwald said.

“The risks remain firmly on the downside.”

The Chinese economy was hit much harder than projected, though a tentative stabilization has begun, S&P said citing initial data.

Severe impact is seen in Europe and the US as containment measures such as social distancing and travel bans are set to lead to a demand collapse and hence, economic activity is expected to be sharply lower in the second quarter, the rating agency said.

A recovery is likely later this year, S&P added.

The rating agency forecast China’s growth for this year at 2.7-3.2 percent. Economic growth is set to be flat in the second quarter and a recovery is seen in the second half, the firm said.

Chinese authorities don’t appear to be planning a big fiscal stimulus, though targeting spending will continue, and the People’s Bank of China will intervene to keep liquidity flowing, S&P said.

In the euro area, where many countries have gone into lock-down as the virus spreads, the economy is expected to contract in the first quarter, and shrink more significantly in the second quarter, which is likely to be followed by a modest recovery.

S&P projected 0.5-1 percent contraction for the Eurozone economy this year.

“The European Central Bank seems unlikely to lower policy rates much, but it will use cheap long-term refinancing operations (LTROs) and targeted LTROs to smooth the operation of the financial sector,” S&P said.

“We also expect stepped-up EU-level fiscal efforts to support the hardest-hit firms and populations.”

In the US, the sectoral hits should be similar to that of Europe, with the key addition of the oil and gas sector, given the plunge in global prices, the firm said.

The contraction is likely to be marginal in the first quarter, thanks to a strong start to the year and the lag in many key metrics. But, the hit would be much severe, as much as an annualized 6 percent contraction, in the second quarter before recovery in the second half of the year.

“The Fed has already acted, and its intentions are clear,” S&P said.

“We expect short-term, targeted fiscal stimulus at the federal level soon.”

The severity of the economic shock in the emerging markets will largely depend on capital flow and commodity dependency.

Emerging economies with external imbalances such as huge current account deficits and those with a high stock of external debt, and oil exporters are especially at risk, S&P said. Meanwhile, oil imports should benefit, the firm added.

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