The economic fallout from the coronavirus crisis continues to broaden and deepen but Fitch Ratings says its forecasts are starting to show some signs of stabilisation. Activity levels should start to rise in the months ahead, provided that a sharp resurgence in virus cases is avoided as lock-downs are relaxed. However, it will take a long time to return to normalcy, the ratings agency says, adding that we are unlikely to reach pre-virus levels of gross domestic product (GDP) before mid-2022 in the US and significantly later in Europe.
Fitch Ratings has made further cuts to world GDP forecasts in its latest global economic outlook (GEO), but says the slump in global economic activity is close to reaching its trough. "World GDP is now forecast to fall by -4.6% in 2020 compared to a decline of -3.9% predicted in our late-April GEO. This reflects downward revisions to the eurozone and the UK and, most significantly, to emerging markets (EM) excluding China," says Brian Coulton, chief economist at Fitch Ratings.
According to the ratings agency, the enormous magnitude of the lock-down-related shock to global activity has now started to reveal itself in hard macroeconomic data. No less than 17 of the Fitch 20 countries have reported—or are expected to report—economic contractions in first quarter (1Q) of FY20-21 and all but China will see GDP fall in 2QFY20-21.
Fitch says it estimates that world GDP fell by 3.4% quarter-on-quarter (q-o-q) in 1QFY20-21 and forecasts that it will decline by 5.8% in 2QFY20-21, numbers simply unimaginable prior to the pandemic. The global recession this year will be more than twice as severe as in 2009, it added.
According to the ratings agency, the biggest contribution to the downward revision in global GDP for FY20-21 comes from EM (emerging markets) excluding China, where it now sees GDP falling by 5% in India and Russia and by 6%-7% in Brazil and Mexico. It says, "We expect output in EM excluding China to fall by 4.5% this year compared to a predicted fall of 1.9% before. This large revision reflects the deterioration in the health crisis in many of the largest EMs over the past month or so, including in Brazil, India and Russia."
"This reflects the surge in coronavirus infections from mid-April and measures taken to contain the outbreak. The biggest forecast cut was to India where we now anticipate a 5% decline in the current financial year (ending March 2021) in contrast to an earlier forecast of growth of 0.8%. India has had a very stringent lock-down policy that has lasted a lot longer than initially expected and incoming economic activity data have been spectacularly weak," Fitch says.
Infections accelerated sharply in Brazil and Russia from mid-April and the ratings agency now sees GDP falling by 6% in Brazil (revised from -4% in the previous GEO) and by 5% in Russia (-3.3%) this year.
The ratings agency also expects eurozone GDP to fall by 8.2% in 2020 compared with a contraction of 7.0% in its previous GEO. This, it says, reflects incoming data that point to larger-than-anticipated falls in activity in France, Italy and Spain amid lock-downs that were more stringent than those in some other countries.
"We now expect the GDP of Spain to fall by 9.6% (compared to -7.5% in the end-April GEO), by 9.5% in Italy (-8.0%) and by 9.0% in France (-7.0%) in 2020. The lock-down in the UK also looks set to last longer than previously assumed; with a sharp fall in GDP published by the Office for National Statistics for March, we now expect the economy to contract by 7.8% this year compared with -6.3% before," the ratings agency says.
Forecasts by Fitch for 2020 GDP growth for China, the US and Japan are unchanged since late April at 0.7%, -5.6% and -5.0%, respectively. Fitch affirmed its forecasts for Australia, Korea and South Africa, so its assessments of global economic prospects are starting to stabilise, following a succession of downward forecast revisions in recent GEO updates.
This, the ratings agency says, concurs with other evidence that the collapse in global economic activity may be close to bottoming out. "A number of early monthly economic indicators for May have improved slightly on their April values and daily mobility data show consumer visits to retail and recreation venues have increased in the eurozone and the US since lock-downs started to be eased in late April and early May," it says.
Fitch says, its weekly US growth tracker has edged up slightly in the past two weeks and is consistent with its earlier forecast of a 10% decline in 2QFY2020. It says, "These are all tentative signs, but China's recent experience suggests that activity will rise after lockdowns are eased. Industrial production is now back to December 2019 levels and fixed asset investment and credit growth are rising."
Moreover, global macroeconomic policy stimulus has been increased further over the past month or so, beyond the already announced huge commitments. The US has announced an additional fiscal package valued at more than 2% of GDP (with more being discussed), Italy unveiled a second wave of easing measures, the UK extended its job-subsidy scheme, and Fitch says it now expects China's general government fiscal deficit to widen to 11.2% in FY20-21 from 4.9% in FY20-21.
"We predict that global quantitative easing (QE) will reach USD6 trillion in 2020, equivalent to half of the cumulative QE purchases by the US Federal Reserve, European Central Bank (ECB), Bank of England and Bank of Japan combined in 2009-2018. This explosion in central bank liquidity has helped to secure a pick-up in bank credit to the real economy (specifically, to firms) in the past couple of months, a development that contrasts with the pattern in 2009," it added.
Nevertheless, according to Fitch, the return to economic normality is likely to be a slow and bumpy process. The rupture in the labour market - with US unemployment now expected to peak at 20% in May—and ongoing social distancing will weigh heavily on consumer spending post-crisis, while firms will be very cautious on capital spending.
Mr Coulton from Fitch says, "We foresee a 'technical' pick-up in global GDP growth to 5.1% in 2021 - with US and eurozone output rising by around 4% - but pre-virus levels of GDP are unlikely to be reached until mid-2022 in the US and significantly later in Europe. This is despite massive policy stimulus".
An aggressive resurgence of the virus that necessitated greatly extended or renewed nationwide lock-downs would lead to an even worse outcome. Fitch's downside scenario sees GDP falling by 12% in the US and Europe in 2020 and global GDP down by more than 9%.
"This will make people cautious, but there will be further challenges to consumer spending from voluntary social distancing behaviour and remaining restrictions on travel, retail and recreational activity. The path back to pre-crisis levels of activity will be prolonged, however, with job losses and bankruptcies in the lock-down contributing to lasting damage both to demand and supply," the ratings agency concludes.
