Moody's cuts growth forecasts as coronavirus expected to slow economic activity

Ratings agency Moody's has cut the growth forecasts for G-20 countries for the first half of 2020, given the impact of the coronavirus on economic activity.

Moody's on Friday issued an update on its forecasts for the global macro outlook and the ratings agency anticipates that the coronavirus will "hurt" economic growth in many countries, particularly slowing business and consumer activity.

Moody's expects the group of G-20 economies to grow 2.1% during 2020. This is 0.3 percentage points lower than the previous forecast issued just weeks ago in mid-February, according to the report authored by vice president Madhavi Bokil, a senior credit officer. Moody's is the only ratings agency that has South Africa ranked at investment grade at Baa3. It lowered South Africa's growth forecast for 2020 from 0.7% to 0.4%. China's growth forecast has been lowered from 5.2% to 4.8% and the US forecast has been lowered from 1.7% to 1.5%.

"The evolution of the virus remains highly uncertain and the full extent of the economic costs will be unclear for some time. Fear of contagion will significantly affect consumer behavior. The economic impact will magnify the longer it takes for households and businesses to resume normal activity," Bokil said.

Moody's expects economic activity to pick up again in the second half of the year, assuming that warmer weather in the Northern Hemisphere as summer arrives will weaken the spread of the virus and that global efforts to arrest the spread of the virus will be successful.

Bokil said that the spread of the virus was "severely" impacting trade and supply chains, "depressing" consumption and demand in affected countries. "There is not enough economic data yet to fully gauge the impact of the outbreak on China’s economy and the rest of the world so far," Bokil said.

Moody's said that policy announcements by fiscal authorities and central banks suggested that responses to the outbreak will be strong. The International Monetary Fund this week pledged $50bn to help countries fight the virus, BBC previously reported.

Moody's noted that risks of a global recession have since risen. A worse-case scenario would be if the infection rate increases "more and rapidly" and if the contagion lasts longer. This could dampen consumption even further and potentially lead to the business closures, hurt earnings and possibly drive retrenchments. "Such conditions would ultimately feed self-sustaining recessionary dynamics," Bokil said.

Resulting volatility in asset prices would impact emerging market countries. Under an "extensive and prolonged slump" Moody's expects commodity prices to remain subdued. Advanced economies like China, the US and UK would experience weak growth, similarly will emerging market countries like SA and Mexico, Bokil said.

Given the wide range of unknowns about the future spread of the virus and the economic consequences thereof, Bokil said that the degree of uncertainty on Moody's forecasts are "unusually high". The ratings agency will continue to monitor the spread of the virus as well as assumptions that it would moderate in warmer weather.

Moody's will also be tracking how quickly consumers resume normal economic activity in affected countries and how effective central banks are in "limiting financial market stress", as well as the speed and scope of fiscal authorities. The ability of healthcare systems in affected countries to manage the epidemic will also be monitored.

Global markets continued on a downward trend this week, on coronavirus fears. The JSE's All-Share and Top-40 indices both closed nearly 2% lower on Friday. The financials index lost as much as 3.11% on Friday, compared to resources which lost 2.04% and industrials which lost 1.3%, Fin24 previously reported.

Compiled by Lameez Omarjee

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