Baseline Forecast: Spread should be contained by end of Q1, allowing for resumption of normal economic activity in Q2Excerpts from Moody’s Investor Service February 2020 Outlook. Visit here to access the full report
Coronavirus outbreak has diminished optimism about prospects of an incipient stabilization of global growth this year. With the virus continuing to spread, it is still too early to make a final assessment of the impact on China (A1 stable) and the global economy. We have revised our global GDP growth forecast down, and we now expect G-20 economies to collectively grow 2.4% in 2020, a softer rate than last year, followed by a pickup to 2.8% in 2021.
We have reduced our growth forecast for China to 5.2% in 2020 and maintain our expectation of 5.7% growth in 2021. We have also lowered our real GDP growth forecast for Australia (Aaa stable), Korea (Aa2 stable) and Japan (A1 stable) on account of the coronavirus. Additionally, we have reduced our growth projections for India (Baa2 negative), Mexico (A3 negative) and South Africa (Baa3 negative), a reflection of domestic challenges in those countries rather than external factors.
China ‘s Economy Worst Effected… By Far
Our baseline assumes the outbreak will cause disruption in Q1 economic activity. Under our baseline forecast, the spread of the coronavirus will be contained by the end of Q1, allowing for resumption of normal economic activity in Q2. At present, China’s economy is by far the worst affected. However, the rest of the world also has exposure as a result of a hit to global tourism in the first half of this year and short-term disruptions to supply chains. The effects on the global economy could compound if the rate of infection does not abate and the death toll continues to rise, because supply chain disruptions in manufacturing would become more acute the longer it takes to restore normalcy.
Pause in US-China trade tensions does not materially change our assessment of global growth prospects. The “phase one” trade deal reduces risk of near-term escalation of the trade battle between the US (Aaa stable) and China, but uncertainty has not gone away. The adverse economic consequences of the coronavirus will make it even more challenging for China to meet its import commitments under the agreement.
Moreover, US tariffs on $370 billion of imports from China remain in place, while US tariffs on steel and aluminum are also still in effect. Trade risks stemming from other disputes also remain elevated. For example, the US threat of 25% tariffs on auto and auto parts imports, which would primarily affect large auto-producing countries such as Germany (Aaa stable) and Japan, remains on the table. And 2020 being a US presidential election year, uncertainty over US trade policy will likely stay elevated.
Just as global growth appeared poised to stabilize, coronavirus outbreak puts it at risk
Since the publication of our 2020-21 Global Macro Outlook in November, two positive developments have raised the prospects of an incipient stabilization of global growth this year: a truce in the US-China trade war with the signing of the “phase-one” trade deal in January, and nascent signs of a pickup in the industrial sector, which had been hurt by slower growth in China and trade tensions. Additionally, the UK (Aa2 negative) exited the European Union (EU, Aaa stable), avoiding a no-deal outcome in January and moving the Brexit process to the next phase. Meanwhile, weakness in the industrial sector has not spread to the services sector in the US and Europe. Also, financial conditions remain favorable, aided by supportive policies in a number of major economies.
But the outbreak of the coronavirus has dented this optimism. With the virus continuing to spread within China and to other parts of the world, it is still too early to make a final assessment of the impact on China and the global economy. The fear of contagion has led to the temporary shutdown of businesses, markets and cities throughout China, which will negatively affect commerce in the country. The outbreak will primarily hurt China’s economy by lowering discretionary consumer spending on transportation, retail, tourism and entertainment. There is already evidence — albeit anecdotal — that supply chains are being disrupted, including outside China. If the outbreak persists, domestic and international supply chain disruptions are likely to become significant, amplifying the shock to the global economy.
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