Coronavirus outbreak will dampen global economic growth, even if it is contained

Moody’s Investors Service has revised its Global Macro Outlook and its baseline growth forecasts for all G20 economies as coronavirus outbreak has spread rapidly outside China to a number of major economies.

Moody’s believes that even if the virus is steadily contained, the outbreak will dampen global economic activity well into the second quarter of this year.

The agency has revised the baseline growth forecasts for G20 economies to 2.1 percent, 0.3 percentage point lower than the previous baseline. China’s 2020 growth forecast has also been reduced to 4.8 percent from the previous estimate of 5.2 percent.

For the US, growth of 1.5 percent is now expected, down from the previous estimate of 1.7 percent.

Furthermore, it noted that weak demand will translate into generally subdued commodity prices and oil prices will remain volatile. Additionally, prolonged business closures would impact earnings and drive layoffs.

According to Moody's, heightened asset price volatility would also result, serving to magnify and transmit the shock across borders, including to emerging market countries. It said that currently the uncertainty remains unusually high.

“Several plausible developments could lead to a far more negative scenario than our baseline forecast,” says Moody’s Vice President Madhavi Bokil. “A sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment. Such conditions could ultimately feed self-sustaining recessionary dynamics.”

Moody's stated that policy announcements from fiscal authorities, central banks and international institutions so far suggest that policy response is likely to be strong and targeted in affected countries. Targeted fiscal policy measures will likely help limit the damage in individual economies.

Moody’s also expects central banks to adopt an easier stance, reinforcing fiscal measures.

The US Federal Reserve’s decision to cut the federal funds rate by 50 basis points and the announcements from the European Central Bank and the Bank of Japan assuring policy support will partially limit global financial market volatility and partly counter the tightening of financial conditions.