New Delhi, March 23: The rapid spread of the coronavirus in the last two weeks, widespread business closures and unprecedented restrictions on social interactions will result in a permanent hit to global economic activity this year, stated a report by Moody’s Investors Service on Monday.
It cautioned that a sharp contraction of the global economy, at least in the second quarter, appears imminent. Uncertainty will remain for at least several months as to how long it will take to contain the spread of the virus and how businesses and households will cope with the resulting financial losses.
“Financial market volatility is at levels that last occurred during the global financial crisis. And fear about the huge hit to business activity is contributing to extreme risk-off sentiment, resulting in the repricing of equities, commodities, bonds, and currencies,” the report added.
On the real economy side, recently released data from China offers a glimpse into the impact of the unfolding consumption shock. The official data suggests a sharp contraction relative to last year in retail sales (-20.5 per cent), industrial production (-13.5 per cent), fixed asset investment (-24.5 per cent) and job losses (5 million) in January and February.
The report, however, clarified that the plateauing of the number of new infections in China – the so-called flattening of the curve will allow for a normalisation of economic activity over the second quarter. However, this process will undoubtedly be slow because many of China's curbs on social interactions will remain in place to prevent a renewed outbreak.
“We expect a muted recovery in China in the second quarter, with factory output likely picking up more quickly than activity in the services sector,” the report stated.
Outside Asia, evidence of costs to the real economy is becoming evident in Italy, France, Germany, Spain, the UK, and the US. As business grinds to a halt, big and small firms are starting to lay off workers temporarily in an attempt to cut costs, it added.