The global economy faces a slightly more moderate contraction in 2020 than expected three months ago, though new government restrictions to contain the pandemic will set back recently regained momentum, with divergent implications for sovereign ratings, Scope Ratings agency says in its report where a baseline forecast is for a contraction in the global economy of around 4% in 2020, compared with its July forecast of a 4.5% slump, with growth rebounding by 6% in 2021, compared with a previous forecast of 5.8%. The 2020 forecast nonetheless represents the sharpest global contraction of the post-war era.
Under a stressed scenario, Scope expects a deeper global contraction of 6.5% this year and only 4.8% growth in 2021 assuming that, in the months ahead, governments reimpose lockdowns on a similar scale to those in early 2020 under this alternative scenario.
“We have expected the economic recovery will become more uneven and subject to interruption by this stage in 2020 after the sharp recoveries mid-year when governments ended lockdowns in Europe and North America,” says Giacomo Barisone, head of Sovereign and Public Sector ratings at Scope. “The re-imposition of restrictions to contain the resurgence in COVID-19 will inevitably have an impact on curtailing economic activity. While the trajectory of COVID-19 remains highly uncertain, our baseline scenario remains for a severe contraction in output in 2020 even though, as governments and public health sectors are better prepared than in March and April, we don’t generally expect a return in forthcoming months to the same scale of drastic restrictions of earlier this year under the baseline. However, under any scenario, the return to more normal levels of economic activity will take time and there will be setbacks as we are now experiencing.”
Second wave of the virus has slowed or even temporarily reversed national economic recoveries. The latest measures to contain the pandemic will slow down the recovery particularly in more hard-hit countries such as the US, the UK, Spain and France. After moderate interruptions to economic recoveries in Q4, including outright contractions in Q4 GDP expected in cases, recovery should, nevertheless, regain momentum by the spring of 2021 under the Scope baseline.
An important possible exception to significant renewed economic restrictions in Q4 is China, with a sustained recovery since the first quarter as authorities have mostly contained the transmission of COVID-19 over recent months. Scope forecasts growth in China of 1.3% this year — the weakest since 1976 — accelerating to 9% in 2021.
Emergency financial measures to protect households, workers, and businesses — including around €700 bln in fiscal stimulus in the euro area — amid the lockdowns and other healthcare-related restrictions have led to rapidly rising government borrowing. “Higher debt ratios weaken general government balance sheets,” says Barisone. “In addition, putting fiscal consolidation on hold as central banks ensure easy financing conditions creates moral hazard. These are credit concerns — though ratings implications will vary country by country. At the same time, the forceful monetary and fiscal policy responses to this crisis have moderated the degree of deterioration in sovereign creditworthiness near term.” Countermeasures have placed a floor beneath the economy, maintained low interest rates for many public sector borrowers and transferred significant sovereign debt from private sector balance sheets to central banks, in addition to forestalling sovereign liquidity crises.
In the euro area, Scope has revised the Outlook on ratings for Italy, Slovakia and Spain to Negative. The modest upward revision to Scope’s 2020 global baseline forecast to -4% mostly reflects somewhat more optimistic assessments of activity in the US (+1.5pps to -6%) and the euro area (+0.6pps to -8.5). Spain (-12%), France (-10.1%) and Italy (-9%) will nonetheless experience deep recessions this year, compared with a less drastic slump in Germany (-5.6%). Euro area unemployment has, however, not increased in line with the depth of output losses due to the exceptional policy action taken this crisis.
Outside the EU, the UK faces among the world’s deepest recessions with a contraction of 10.8% in 2020, including continued anticipation of a Q/Q contraction in Q4, though the UK could also see one of the sharpest recoveries next year, with growth of 8%. Scope expects milder recessions in Turkey (-1.4%) and Russia (-5.5%) this year than previously forecast.