Coronavirus dents optimism just as global economy showed signs of stabilisation

• Moody’s says downside risks to the global economy would be severe if the coronavirus grows to pandemic proportions
• Fear of coronavirus contagion will negatively affect commerce in China

The coronavirus epidemic creates new risks to the prospects of an incipient stabilisation of global growth this year resulting from a truce in the US-China trade war and emerging signs of a pickup in the industrial sector.

Moody’s Investors Service has revised its global growth forecasts down by two-tenths of a percentage point, now expecting G-20 economies to collectively grow at an annual rate of 2.4% in 2020. The rating agency has also revised downward the GDP growth forecasts for China to 5.2% in 2020, and maintains expectation of 5.7% growth in 2021.

“The outbreak will first and foremost 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. Furthermore, extended lockdowns in China would have a global impact given the country’s importance and interconnectedness in the global economy,” says Moody’s Vice President Madhavi Bokil.  “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 toll on the global economy would be severe if the rate of infections does not abate and the death toll continues to rise. If the outbreak persists, the domestic and international supply chain disruptions are likely to become significant, amplifying the shock to the global economy. 

Global companies operating in the affected areas would face output losses as a result of the extended closures of businesses and factories. Companies that operate outside China but depend on inputs from the affected area would face temporary production delays.  In addition, the negative spillover would also affect countries, sectors, and companies that either derive revenue from or produce in China, or rely on Chinese demand.

Apart from China, Moody’s has also reduced the growth forecasts of Korea, Japan and Australia on account of the coronavirus outbreak. The negative shock to China’s economy has the potential to harm the stabilisation and recovery of other economies through trade and tourism channels.  Growth forecasts for advanced economies are mostly unchanged. 

Among emerging market countries, Moody’s has materially revised downward the growth forecasts for India, Mexico and South Africa, reflecting domestic challenges rather than external factors.