Covid-19 an economic tsunami; biz failures, bankruptcies coming: Moody's

Moody's believes Asia to be past the worst of the virus, and while there is still considerable economic fallout to come, the region's economy should be able to eke out a small gain in GDP in 2020

Coronavirus (Covid-19) pandemic has created a global economic tsunami, warns Moody’s Analytics, given how rapidly the virus has spread across countries and has forced lockdowns. China’s experience with COVID-19, Moody’s Analytics said, demonstrates the economic devastation the disease brings to an economy.

"The economic tsunami that hit China and much of Asia earlier in the year and hit Europe a few weeks ago is now slamming the US economy as more parts of the country require nonessential businesses to shut down. This sudden stop in the economy is unprecedented. The only analogue is the 9/11 terrorist attack. But that lasted for a day or two, and except for airlines, businesses continued to operate," wrote Mark Zandi, chief economist at Moody's Analytics in a recent report.

The agency had pegged the global real GDP growth of 2.6 per cent in 2020 before the COVID-19 pandemic. “With the virus now shutting down travel, trade and many businesses, the global economy is expected to suffer with real GDP falling by 0.4 per cent.” the agency said.

More financial pain – the first wave of this economic tsunami – Moody's said, is on its way as layoffs rise, businesses curtail investment, and retirement nest eggs evaporate. That said, while the global central banks have responded aggressively, they too, are running out of dry powder to combat the crisis as interest rates are nearing zero.

“The onus is now on governments to quickly provide substantial financial support to hard-pressed households and businesses. How much economic damage COVID-19 ultimately does will depend on the trajectory of the virus—and how governments respond,” Zandi said.

The second wave of the economic tsunami, Moody's Analytics said, will hit when the other half of households come to terms with their much-diminished wealth. Wave three will be a sharp pullback in business investment. Businesses were already on edge from the trade war between the US and China, Brexit, and a long list of other geopolitical concerns. But the virus will be too much to bear.

“A surge in business bankruptcies and failures is surely coming. It will further exacerbate the investment decline and be an impediment to the future economic recovery,” Zandi wrote.

China and corporate debt

Among regions, Moody's believes, Asia to be past the worst of the virus, and while there is still considerable economic fallout to come, the region’s economy should be able to eke out a small gain in gross domestic product (GDP) in 2020. However, China’s economy, it believes, should stage a strong comeback and be fully up and running later this year.

“Our baseline outlook for the global economy is increasingly pessimistic. Still, given how quickly events are moving and the high degree of uncertainty around the virus’ path, it may not be pessimistic enough. There are three critical known unknowns – the trajectory of the virus, the policy response, and what other problems may develop due to the extraordinary pressure on the economy and financial system. Numerous and far darker economic scenarios are possible depending on how these — and other unknown unknowns — play out,” Zandi wrote.

Another key concern, according to the Moody's, is the rising corporate debt level. “There are many large multinationals with strong balance sheets and little debt, but there are also many highly leveraged companies that will likely face a Hobson’s choice - make their debt payments in a timely way or cut payrolls and investment. Either way the economy will suffer,” Moody's warns.

 

Moody's recession