Risks to economic recovery rise as Covid-19 infection rate spikes: Moody's

The continued rise in new infection rates across parts of Europe and Asia highlights the risk of a second wave which could lead to renewed closures and a pullback in consumption, Moody's has said

The continued rise in new infection rates across parts of Europe and Asia highlights the risk of a second wave of infections which could lead to renewed closures and a sustained pullback in consumption, Moody's Investors Service has said.

In the most recent week, close to half of G-20 economies loosened lockdown measures, highlighting difficulties in balancing economic recovery with health risks.

"High-frequency data show that economic activity in the United States, euro area and China is moderating as risks to the recovery are increasing amid persistent uncertainty around global containment of the pandemic," said Moody's in the latest sector in-depth report on global macroeconomics.

New infection rates are rising in seven of the G-20 economies. Infections have begun to level off in the United States, Canada and Latin America although they remain at high levels in some areas, but infections are rising across Europe and Asia.

High frequency alternative data indices suggest a synchronised pickup in trade activity across the G-20 economies. But manufacturing activity is lagging in Japan, Korea and Mexico.

However, new data suggest that the rebound in retail sales is slowing down. Also, high frequency data for August and early September point to a slower pace of recovery in economic activity across the United States and euro area, and to a deterioration in China.

Even though fiscal support to households and an accumulation of savings have led to a consumption rebound, concerns about the pandemic globally are still deterring consumers from engaging in high-contact economic activities.

Moody's proprietary indices show that US financial conditions have returned to long-term historical levels while improvement in the euro area and emerging markets is gaining traction, albeit at a slower pace. However, financial markets momentum can reverse if the virus continues to spread.

Additionally, while advanced economies have larger capacity for fiscal and monetary stimulus, policy support in emerging markets might be constrained, further hindering the recovery of economic activity.