COVID 19 Pandemic Scenario ANALYSIS Known Unknowns

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MOODY S ANALYTICS,COVID 19 Pandemic Scenario,Known Unknowns. BY MARK ZANDI, he coronavirus is an existential threat to the record long global economic expansion The Centers for. Disease Control and Prevention says it is likely that COVID 19 will become a global pandemic If the CDC s. warning comes to pass then recession will be difficult to avoid. This is also the assessment of global inves ing the path of COVID 19 it is prudent to duce less and workers who are not working. tors who have dumped stocks in recent days consider various scenarios The most likely our will buy less It adds up to lower profits or. as they vastly mark up the probability of a baseline scenario continues to be that while even losses And that is what has stock inves. downturn The downdraft in stocks as much the global expansion will be much diminished tors particularly nervous Most businesses. as 12 5 from the record peak just a couple of by the virus the expansion will remain intact will have little choice but to be more cau. weeks ago has wiped out an astounding over But odds are uncomfortably high and rising tious and hold the line on investments and. 4 trillion in stockholder wealth see Chart 1 that the global economy will suffer a down hiring The hardest hit will have no choice. For context this is about one fifth of annual turn Which scenario unfolds depends most but to lay off workers. U S GDP Credit spreads in the bond market critically on how widespread and virulent the China s travails also suggest that economic. have also sharply widened signaling height pandemic becomes whether businesses and recovery from the virus will prove difficult. ened investor angst consumers are able to keep their wits and the More than two months after the virus came. Global central banks are responding to monetary and fiscal policy response on the scene in China the country s economy. the crisis by cutting rates Before the U S shows only tentative signs of reviving We. stock market closed its historically bad week Direct hit estimate that to date the virus has reduced. February 28 Federal Reserve Chairman Je China s experience with COVID 19 is a Chinese GDP by 1 3 percentage points 5 2. rome Powell issued a statement all but say case study of what a direct hit by the pan annualized in the first quarter and the eco. ing that the Fed would soon lower interest demic means for an economy Travel tourism nomic damage continues to quickly mount. rates Sure enough on March 3 the Fed im and trade will be significantly disrupted if not see Chart 2 Real time indicators of the. plemented an emergency 50 basis point rate shut down Global air. cut the first since the 2008 financial crisis lines and hotel chains Chart 1 Global Investors Discount Risks. Cutting rates is the appropriate response are already grappling Wilshire 5000. but the Fed s emergency cut had the unin with cancellations 35 000. tended effect of spooking investors Stock Workers will not be. prices fell sharply Investors probably figured able to get to their 34 000. that if the Fed felt compelled to such a dra jobs if they are sick 33 000. matic action then the economy was even or quarantined and if. more at risk than they had thought Inves schools and day care. tors may also be wondering how much more centers close parents 31 000. room the Fed has to maneuver The federal will have to stay home. funds rate the rate the Fed directly con with their children and. trols is now hovering just over 1 work fewer hours 29 000. 01 02 20 01 17 20 02 01 20 02 16 20 03 02 20, Given this increasingly problematic back Without workers. Source Six Financial Information Moody s Analytics. drop and the significant uncertainties regard businesses will pro. February 2020 1,2 March 2020,MOODY S ANALYTICS, Chart 2 Chinese Body Blow Chart 3 American Consumers Get Anxious. Cumulative lost output of Chinese GDP Morning Consult s Index of Consumer Sentiment. HE BE 114 5,QI SA SD TJ,SX HN JA 114 0,HU JI 0 00 0 01.
0 01 0 04 113 0,Lost output as of YU GX GN,Mar 3 2020 1 3 ppts 0 04 0 14 112 5. CH HA 0 14 0 29 01 01 20 01 15 20 01 29 20 02 12 20 02 26 20. Source Moody s Analytics Sources Morning Consult Moody s Analytics. February 2020 2 February 2020 3, economy s performance such as coal con in all of the surveys However perceptions lower rates and given that their currencies. sumption at Chinese utilities property trans can rapidly turn perhaps more quickly now have remained stable so far in this crisis. action volumes and passenger volumes re than ever before Members of the huge baby they have some latitude to ease policy. main moribund as of early March boom generation are far and away the larg However to avoid a downturn the global. This is despite a strong desire by Chinese est owners of stocks with well over half of economy will likely need timely help from. authorities to get the economy back up and all stockholdings Baby boomers in their 50s fiscal policymakers Asian governments have. running and may suggest the virus is more and 60s hold stocks that make up the bulk of turned aggressive in their fiscal response. widespread and debilitating than thought It their retirement nest eggs When stock prices with various tax cuts and increased spending. also indicates how difficult it is to restart a are up they feel great But if stock prices stay occurring in China Hong Kong India Singa. complex economy after it goes off line down after the current slide and that nest pore and Thailand Elsewhere the fiscal pol. egg shrinks you can imagine how they will icy response has been more muted at least. Collective psyche feel and act Indeed consumer sentiment ap so far The problem in Europe is a lack of. Magnifying the economic impact of the pears to be slipping and cracks in the firewall fiscal space given already high government. virus and making it more difficult to gauge are forming see Chart 3 debt loads with the exception of Germany. is what it will do to the collective psyche It But German politics and laws around using. does not augur well that global businesses Policy stimulus discretionary fiscal policy are vexed. were already skittish before COVID 19 hit Whether the global economy suffers a re In the U S the Trump administration and. The trade war between the U S and China cession will depend in significant part on how Congress could get together and pass legis. has been especially disconcerting for busi deft policymakers are in responding to the lation to provide fiscal stimulus to the econ. nesses In the U S it has pushed the manu crisis The Fed and other global central banks omy An effective stimulus package might. facturing agriculture and transportation appear to be all in on fighting the economic include at the very least a payroll tax holiday. industries into recession President Trump fallout from the crisis Like the Fed Asian cen and expanded SNAP food stamps and un. called a partial truce with the Chinese late tral banks have already begun cutting rates employment insurance benefits Such stimu. last year just in time to avoid a full blown Much more monetary easing is com lus was provided in the midst of the financial. downturn but businesses remain on edge ing although most global central banks are crisis when the Obama administration won. They understandably figure the president constrained by the already exceptionally low just enough Republican support in the Sen. will double down on his trade war if re elect global interest rates European and Japanese ate to pass a recovery act That worked and. ed The trade war put the economy on its interest rates are already firmly negative the recession ended a few months after the. heels and it would not take much of a push and rates in much of the rest of the devel stimulus was implemented. to put it flat on its back COVID 19 looks oped world are not far from zero Even U S However given the highly charged par. more like a full body blow long term Treasury rates are not immune tisan environment in the lead up to the. The American consumer is the firewall from turning negative Ten year U S Trea presidential election it is hard to imagine. between continued global economic growth sury yields have fallen to a record less than Trump who keeps hammering congres. and a recession Unlike businesses consumers 1 With rates this low quantitative eas sional Democrats over their criticism of his. had been feeling pretty good Buoyed by low ing Fed purchases of bonds to lower lon handling of the administration s response to. unemployment and until now surging stock ger term rates makes little sense Emerging the virus striking any such deal at least not. prices consumers were upbeat as shown market central banks have more room to any time soon. 3 March 2020,MOODY S ANALYTICS, Global Pandemic scenario Table 1 Global Real GDP Growth Under Different Baseline and. Under our alternative Global Pandemic Pandemic Scenarios. scenario we expect that there are ultimately change. millions of infections across the globe in, cluding in Europe and the U S COVID 19 s 2020Q1 2020Q2 2020Q3 2020Q4 2019 2020. mortality rate is assumed to be 2 3 Jan baseline 2 7 2 9 2 7 2 6 2 5 2 6. consistent with the experience so far and a World Feb baseline 1 4 3 6 3 1 2 6 2 5 2 4. similar percentage of those infected become Mar prelim baseline 1 0 2 2 3 6 2 7 2 4 2 0. so sick they need some form of hospitaliza Pandemic 1 0 3 5 0 9 1 4 2 4 0 1. Jan baseline 1 5 2 2 1 5 1 2 2 3 1 8,tion The peak of the pandemic is assumed.
Feb baseline 1 2 1 8 1 8 1 4 2 3 1 7,to occur in March and April winding down U S. Mar prelim baseline 1 0 0 8 1 8 2 1 2 3 1 5, quickly by this summer with a vaccine in Pandemic 0 8 2 9 2 0 0 2 2 3 0 2. place before next winter Jan baseline 7 2 6 6 5 5 5 8 6 1 6 2. Once the pandemic becomes significant Feb baseline 0 2 11 5 8 2 5 8 6 1 5 4. in a country that economy shuts down much Mar prelim baseline 0 8 5 2 11 5 5 8 6 1 4 5. as has happened in China Businesses are dis Pandemic 1 8 8 7 0 0 6 4 6 1 0 1. Jan baseline 2 0 2 4 2 5 2 6 1 1 2 2,rupted and many schools and day care cen. Feb baseline 2 0 2 4 2 5 2 6 1 1 2 2, ters are closed making it difficult for parents Brazil. Mar prelim baseline 1 6 2 0 2 5 2 6 1 1 2 0, to get to work International travel and trade Pandemic 6 1 6 8 1 6 1 6 1 1 2 2.
are impaired Stock prices decline consistent Jan baseline 1 2 1 1 1 1 1 1 1 3 1 0. with declines suffered on average in past Feb baseline 1 1 1 3 1 1 1 1 1 3 1 0. recessions In the U S there is an approxi Mar prelim baseline 0 7 0 9 1 2 1 0 1 4 0 8. mately 20 decline in stock values resulting Pandemic 0 7 0 8 0 2 0 3 1 3 0 3. in over 7 trillion in lost wealth Jan baseline 1 4 1 5 1 8 1 4 1 2 1 3. Feb baseline 1 7 1 6 1 7 1 4 1 2 1 3,The Fed and other global central banks Euro zone. Mar prelim baseline 1 1 1 2 1 3 1 3 1 2 1 0, slash interest rates in response The Fed Pandemic 0 5 1 3 0 1 0 8 1 2 0 1. pushes short term rates to the zero lower, bound and 10 year Treasury yields flirt with Source Moody s Analytics. going negative Asian and other emerging, market central banks also lower rates fur globe but the most severe declines occur caveat aside we attach a 35 prob. ther but generally do not push them to the in Latin America as the region s economy ability to this downside Global Pandemic. zero lower bound since doing so would put is hit badly by the slump in global com scenario or something even more severe. too much pressure on their currencies modity prices expected in this scenario and The baseline scenario in which the global. Most governments have so called au the lack of an effective monetary and fiscal economy slows significantly during the first. tomatic stabilizers in their budgets coun policy response quarter of this year but does not suffer an. tercyclical tax and government spending The U S economy contracts in all four outright recession has a 50 probability. policies designed to provide support to their quarters of 2020 in the pandemic scenario This leaves a 15 probability for a scenario. economies in tough times These stabiliz with real GDP falling by approximately that is meaningfully more positive than. ers are helpful in cushioning the economic 1 5 percentage points peak to trough and the baseline. blow of the virus in the pandemic scenario the unemployment rate rising by 175 ba COVID 19 is an especially pernicious. The scenario also assumes there is some ad sis points The struggling manufacturing danger to the global economy Not only is it. ditional discretionary fiscal stimulus particu transportation agriculture and energy a personal health threat which is unnerving. larly in Asia but not in the U S and Europe industries are hit hard but so too are the but it is both a supply and demand shock. where the politics are assumed to be too dif travel and tourism industries and the con to the economy It is a hit to the economy s. ficult to overcome to pass legislation in time struction trades However there are sig productive capability and to the ability and. to do any good nificant layoffs across nearly all industries willingness of consumers and businesses. Under the pandemic scenario the global with healthcare and government being the to spend and invest The policy response is. economy suffers a recession during the notable exceptions also complicated by the already low interest. first three quarters of 2020 Real GDP de Handicapping the path of COVID 19 rates and high government debt loads across. creases by almost 2 percentage points peak and its economic fallout is all but impos the globe The global economy will navigate. COVID 19 Pandemic Scenario ANALYSIS Known Unknowns Introduction The coronavirus is an existential threat to the record long global economic expansion The Centers for Disease Control and Prevention says it is likely that COVID 19 will become a global pandemic If the CDC s warning comes to pass then recession will be difficult to avoid March 2020 Prepared by Mark Zandi Mark Zandi moodys

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