Coronavirus Crisis Is Crushing Global GDP Growth


Friday, March 20, 2020 /6:34 PM / by Fitch Ratings / Header Image Credit: Al-Jazeera


The coronavirus crisis is crushing global GDP growth according to Fitch Ratings in its latest quarterly "Global Economic Outlook" (GEO) published today.


"The level of world GDP is falling. For all intents and purposes we are in global recession territory," said Brian Coulton, chief economist at Fitch Ratings.


We have nearly halved the Fitch baseline global growth forecast for 2020 - to just 1.3% from 2.5% in the December 2019 GEO. The revision leaves 2020 global GDP USD850 billion lower than in the previous forecast. But we could very easily see an outright decline in global GDP this year if more pervasive lockdown measures have to be rolled out across all the G7 economies. Emergency macro policy responses are purely about damage limitation at this stage but should help secure a 'V-shaped' recovery in 2H20, although this assumes that the health crisis eases.


The shock to the Chinese economy has been very severe. GDP is likely to fall by over 5% (not annualised) in 1Q20 and to be down by 1% year-on-year. Falling GDP in China is virtually unprecedented and, in the near term at least, these numbers look worse than most previous hypothetical 'hard-landing' scenarios. The good news is that the daily number of new COVID-19 cases in China has fallen very sharply, which should pave the way for a marked economic recovery in 2Q20 - high-frequency indicators already point to this starting in March.


Nevertheless, the delayed impact of supply-chain disruptions and lower Chinese demand on the rest of the world will continue to be felt profoundly for some time, particularly in the rest of Asia and the eurozone.


Moreover the rapid spread of the virus outside China has prompted sharp declines in travel and tourism, and the cancellation of business and leisure events worldwide as 'social distancing' takes hold. And some other large advanced countries - most notably Italy and Spain (and more recently in France, though after our forecast numbers were finalized) have engaged in aggressive official lockdown responses similar to those seen in China. These countries are likely to see very sizeable outright declines in GDP in the coming months.


The interruptions to economic activity seen in China - and now in Italy - are on a scale and speed rarely seen other than during periods of military conflict, natural disasters or financial crises. While there is huge uncertainty, quarterly declines in GDP of 3% to 5% (not annualised) in a full lockdown scenario look feasible. The risk is that we shortly see these abrupt interruptions happening simultaneously across all major economies as the global pandemic spreads.


Our baseline global economic forecasts have been aggressively lowered. Even though we expect a recovery in China from 2Q20, Chinese growth is expected to fall just 3.7% for the year as a whole, down from 6.1% in 2019. We forecast Italian GDP to fall by 2% this year and Spanish GDP by almost 1%.


Our baseline forecasts do not yet assume that full-scale lockdowns take place in across all the major European countries or the US (forecasts were finalised on 16 March). But even on this basis we now expect eurozone growth to be minus 0.4% this year. The baseline forecast for US growth is 1% in 2020 compared with a pre-virus outlook of 2% and GDP is expected to fall by 0.5% (or 2% annualised) in 2Q20.


This reflects the likelihood that travel, tourism, and business and leisure events will be disrupted for months, the collapse in the equity market, lower business and consumer confidence, and other disruptions to US economic activity that are emerging as authorities seek to contain the virus. We expect global growth to fall to 1.3% in 2020 from 2.7% in 2019, which would be weaker than global downturns in the early 1990s and in 2001.


The high risk of escalating lockdown responses across the major economies means that the chances of a weaker outcome are very substantial. A downside variant to our baseline forecast shows global GDP falling this year - an extremely rare occurrence in the post-war period - with GDP in Europe down by over 1.5%, US GDP down by nearly 1% and Chinese growth slipping to just over 2%.


Our oil price forecast has been lowered to USD41/bbl (Brent) for 2020 (annual average) from USD62.5/bbl in the December GEO. With the collapse of 'OPEC+' co-operation boosting prospects for OPEC supply, we now expect oil prices to average USD48/bbl in 2021 compared to our previous forecast of USD60/bbl.


Emergency macro policy responses are being announced on a massive scale, following a similar playbook to the global financial crisis. These include aggressive interest rate cuts, huge injections of central bank liquidity, macro-prudential easing and the creation of credit support facilities. Large-scale fiscal easing packages and the unveiling of hundred billion dollar-scale sovereign credit-guarantee schemes are also being used to help the private sector withstand shocks from measures necessary to contain the health crisis.


"Rapid and large-scale macro policy responses are all about damage limitation in the near-term, but policy easing should help GDP normalize and recover quickly in the second half of the year on the assumption that the health crisis subsides," said Coulton. "However the uncertainties here are huge and we are really only at the beginning of the process of trying to understand the full impact of the crisis on the world economy".


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