Global recession likely if COVID-19 becomes pandemic: Moody’s

A global recession is likely if COVID-19 becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea, Moody's Analytics said on Wednesday.

In a commentary on the impact and scenarios of the coronavirus, Mark Zandi, Chief Economist at Moody's Analytics said that the coronavirus has been a body blow to the Chinese economy, which now threatens to take out the entire global economy.

"A global recession is likely if COVID-19 becomes a pandemic, and the odds of that are uncomfortably high and rising with infections surging in Italy and Korea", Moody's Analytics said.

The US economy is more insulated from the impact of the virus, but it is not immune, and it too would likely suffer a downturn in this scenario.

The Moody's Analytics baseline (most likely) scenario assumes the outbreak remains contained to China and largely plays out by the spring.

The assumption that the virus will be contained to China appears increasingly tenuous, and the odds of a pandemic are rising.

"We previously put the odds of a pandemic at 20 per cent but we now put them at 40 per cent," the US agency said.

A pandemic will result in global and US recessions during the first half of this year.

"We all hope this black swan will not fly, but it is prudent to be prepared if it does", Moody's Analaytics added.

The note has painted a dire scenario if the coronavirus becomes a pandemic. COVID-19 is battering the global economy in numerous ways. Chinese business travel and tourism has all but stopped, global airlines are not going to China and cruise lines are canceling most Asia-Pacific itineraries.

This is a huge problem for major travel destinations, including in the US, where some 3 million Chinese tourists visit each year. Chinese tourists to the US are among the biggest spenders of any foreign tourists. Travel in Europe is also sure to be severely impacted as Milan, Italy, the center of the new infections in that country, is a major travel hub for the Continent, the research agency said.

Shuttered Chinese factories are also a problem for countries and companies fastened into China's manufacturing supply chain. Apple, Nike and General Motors are some prominent American examples.

Under Moody's baseline scenario, which assumes the outbreak remains contained to China and largely plays out by the spring, the agency has forecast that China's economy will contract in the first quarter of this year, and growth for the year will be cut by a full percentage point to 5.4 per cent.

The global economy will suffer a hit to GDP of almost a percentage point (annualized) in the first quarter, and slow by 0.4 percentage point to 2.4 per cent in 2020. The global potential growth is an estimated 2.8 per cent.

The US economy will experience growth of only 1.3 per cent in the first quarter (annualized), down by 0.6 percentage point because of the virus. Growth in 2020 is now expected to be 1.7 per cent, down 0.2 percentage point. The US economy's potential growth is an estimated near 2 per cent.

"A pandemic will result in global and US recessions during the first half of this year. The economy was already fragile before the outbreak and vulnerable to anything that did not stick to script. COVID-19 is way off script", the agency said.

"COVID-19 came out of nowhere. It may be what economists call a black swan - a rare and inherently unforeseeable event with severe consequences. We all hope the global effort to contain the virus will ensure this black swan will not fly. But it is prudent to be prepared if it does", Moody's Analytics added.