Global economy faces long, bumpy recovery post Covid: Moody’s

Mumbai | Updated on June 22, 2020

The global economy is limping back to life from the Covid-related disruption, but the recovery will be long and bumpy, according to Moody’s Investors Service.

“Global economic recovery will likely be prolonged. Q2 (April-June) 2020 will go down in history as the worst quarter for the global economy since at least World War II.

“We continue to expect a gradual recovery beginning in the second half of the year, but that outcome will depend on whether governments can reopen their economies while also safeguarding public health,” the global credit rating agency said in its June 2020 update, Global Macro Outlook 2020-21.

As per the update, a rebound in demand will determine the ability of businesses and labour markets to recover from the shock.

Moody’s assessed that when economies reopen, many businesses and households are unlikely to recover the losses in revenue and income they sustained during the shutdown. And while some businesses will claw their way back to profit making, a large number will permanently close, resulting in long-term job losses.

Even as the economy slowly recovers, the output losses because of the pandemic shock will never be fully recouped, the agency said.

Permanent scarring

The agency observed: “Some forms of activity are likely to recover more slowly than others. In particular, we expect demand for high-contact services activities to normalize more slowly, if at all, as the fear factor will keep consumers from engaging in these activities.”

Permanent scarring as a result of destruction of businesses and employment in these sectors is highly likely, it warned.

Moody’s said the potential for permanent job losses in these high-contact service sectors is especially of concern because of the large proportion of low skilled individuals employed there.

Contraction in global economy

Moody’s expects G-20 advanced economies collectively to contract 6.4 per cent in 2020 before growing at 4.8 per cent in 2021. G-20 emerging markets will collectively contract 1.6 per cent in 2020, followed by 5.9 per cent growth in 2021.

As per the agency’s forecast, China will be the only G-20 country to post growth in 2020. Its expectation is that China's economy will grow 1 per cent in 2020, followed by a strong rebound of 7.1 per cent in 2021.

A critical assumption in Moody’s baseline expectations for a gradual global economic recovery is that new Covid-19 outbreaks are likely in all countries, but that they will not result in the re-imposition of widespread lockdowns.

This assumption reflects the agency’s view that (1) strict shutdown measures are becoming politically unpopular as a result of “lockdown fatigue” and the large economic costs associated with them, and (2) governments have improved Covid-19 testing and contact tracing infrastructures, which could help prevent localised outbreaks from spreading and turning into a renewed health crisis.

Central banks’ support

Moody’s expects all major central banks to maintain a highly accommodative policy stance until a recovery in both output and employment is firmly in place.

In other words, the agency does not expect any of the major G-20 central banks to materially remove support for at least the next two to three years given the sheer scale of repair needed to make up for lost jobs, incomes and profit across all economies.

In Moody’s view, the deterioration of the US-China relationship makes the economic and geopolitical environment highly uncertain for businesses in both China and the US, as well as for other countries. Asian countries are particularly vulnerable to changes in geopolitical dynamics.

“The rise in tensions between China and countries bordering the South China Sea and clashes on the border with India suggest that geopolitical risks are rising for the entire region,” the agency said.

Published on June 22, 2020

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