It has become clear that the hit to global economic activity from the measures to slow the spread of the Covid-19 pandemic will be massive, says S&P Global Ratings.

“Indeed, analysts in the financial and official sectors are revising their estimates of global gross domestic product (GDP) growth for the first half of 2020 on a near-daily basis.

“Whether these new forecasts imply a corresponding large downward revision in annual GDP growth, depends critically on governments’ policy response – particularly fiscal policy.”

As more data come in on the effects of stay-at-home and other containment measures, there is a growing downside risk to S&P Global Ratings’ forecasts, even from just one week ago, says the credit risk researcher.

For the US, the decline in GDP in the second quarter now looks to be at least double the 6% contraction estimated last week, and S&P Global Ratings now expects a contraction in the first quarter as well.

Europe’s GDP decline for the first half of the year looks to be similar to the US’s, but with a somewhat larger decline in the first quarter than the second because the shock started earlier there.

In contrast, the spread of the virus appears largely contained in China, and its economy seems to be stabilising. 

Anecdotal evidence – such as traffic patterns and shipping data – as well as official figures, show that economic activity is beginning to recover, albeit at a slower rate than originally expected. 

“We estimate China’s GDP contracted 13% (annualised) in the first quarter, but should begin to grow again in the second quarter,” says S&P Global Ratings.

“Emerging markets such as Brazil, India and Mexico were the last group globally to be hit by the pandemic, so we have less data to draw from. 

“We now expect a similar shock to those countries, with possible double-digit percent GDP declines in the second quarter.”

S&P Global Ratings says it acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. 

“Some government authorities estimate the pandemic will peak between June and August, and we are using this assumption in assessing the economic and credit implications.

“We believe measures to contain Covid-19 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers.”

S&P Global Ratings says given the growing size of the demand shock and the corresponding potential dislocation to production and labour markets, governments' policy response is critical. 

“In our view, the objective should be to cushion the effects of the sharp decline in growth and lay the groundwork for recovery. 

“The less dislocation to the real economy now, the faster a rebound can take hold, and the less economic activity will be permanently lost. 

“The focus of policymakers and the public has rightly shifted to fiscal policy.”

Labour-market policy also seems key, because workers in the most-affected sectors are already being laid off at rapid rates. 

The US initial jobless claims report due this Thursday (March 26) could show as many as three-million Americans filing for unemployment insurance, which would be quadruple the 1982 record. 

About 15% of US workers (mainly in the services sectors) are at risk, and depending on the number of jobs lost, headline unemployment could reach the mid-teen percentages. 

Fiscal policy via direct payments or tax breaks can also help ensure that firms have incentives to keep people on the payroll (as Germany, France, and New Zealand, for example, have done) or at least have the means to pay the bills.

What does the end game look like? 

“First, let us hope that the human suffering is minimised and that the economic recovery comes sooner rather than later,” says S&P Global Ratings.

“Speed seems of the essence, as is fostering a setting in which the economy – labour markets and supply chains based on small and medium-sized businesses, in particular – can get back to normal quickly once the pandemic passes. 

“The longer it takes for governments to implement fiscal support, the more damage there’ll be to the economy.

“Regardless, the hit to growth in the first half of the year will be worse than we thought last week.”

S&P Global Ratings is a provider of independent credit risk research. It publishes more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities.