COVID-19 to permanently hit global economic activity: Moody's

The rapid spread of coronavirus in the last two weeks causing widespread business closures and unprecedented restrictions on social interactions will result in a permanent hit to global economic activity this year, Moody`s Investors Service has said in latest global macroeconomic report

It said that a sharp contraction of the global economy, at least in the second quarter, appears imminent and 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.

The Moody`s report said that the short-term economic costs of Covid-19 outbreak are likely to be steep, the world over while the long-term consequences will depend not only on the depth and duration of the hit to economic output, but on whether it will cause lasting damage to balance sheets of households and businesses.

Though the damage from the virus outbreak would be widespread, the Moody`s Investors Service said that strong and targeted policy measures could limit the economic damage to household finances and the balance sheets of the non-financial sector.

Policy measures with the objective of preventing job losses and business failures will likely yield superior long-term outcomes than traditional stimulus measures. In addition, a swift and strong response will help contain the damage to the economy better than a tepid or delayed response, it said.

While the shock could disrupt many sectors, the burden will weigh disproportionately on the transportation sector, the energy industry, hospitality, healthcare and consumer services, especially hotels, restaurants and leisure. "In the worst case, entire industries could be destroyed. The detrimental effects will likely be more acute in some regions than others," the report said.

The ongoing crisis is also taking a toll on financial markets with global indices experiencing a persistent fall and closing at unprecedented lows. "Continued dislocation in financial markets beyond a month or two could create its own self-fulfilling downward spiral. A sharp rise in defaults could also put pressure on bank balance sheets. Additionally, fiscal stimulus measures, which will support growth, will also lead to further increases in sovereign debt levels, which are already high in many countries," Moody`s said.

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Emerging market currencies have sharply depreciated vis-a-vis the US dollar because of safe-haven flows. The report said that emerging market economies will remain vulnerable to heightened volatility of cross-border capital flows over the next few years. Oil producing countries and regions will experience much higher stress if oil prices remain around $30 per barrel over an extended period.