Britain, eurozone face 2% recession in 2020 – S&P

PARIS, France – The coronavirus pandemic will push Britain and the euro area into recession this year, with their economies expected to shrink by as much as 2%, the international ratings agency S&P Global warned on Thursday, March 26.

“The eurozone and UK are facing recessions. We now expect GDP (gross domestic product) to fall around 2% this year due to economic fallout from the coronavirus pandemic,” it wrote in a report.

The spread of COVID-19 has forced 3 billion people around the world into lockdown and economists say the restrictions could cause the most violent recession in recent history.

Central banks and governments have rolled out a wave of unprecedentedly large fiscal and monetary policy packages to shore up their economies. 

To prevent a credit crunch, central banks have injected liquidity and cut rates to lower banks’ refinancing costs and have implemented large asset purchase programs.

S&P said a 2% recession for Britain and the eurozone would amount to a loss in real GDP of about 420 billion euros ($460 billion) in 2020, compared with its previous forecast from November 2019. 

“We expect a gradual rebound of at least 3% in 2021,” the agency said.

S&P said that “swift and bold policy responses taken now are key to avoiding permanent losses to GDP later.”

Downside risks

“Risks are still to the downside, as the pandemic might last longer and be more widespread than we currently envisage. For example, we estimate a lockdown of 4 months could lower eurozone GDP by up to 10% this year,” it said. 

Looking at individual countries, S&P is penciling in economic contraction of 2.6% for Italy, the hardest-hit country by the pandemic, and Spain’s economy is expected to shrink by 2.1%,

The agency is forecasting a 1.9% contraction in GDP for both Germany and Britain and 1.7% for France. 

In Paris, the national statistics office Insee said the confinement measures imposed in France so far had cut economic activity by about 35%, but that it was still too early to provide a firm estimate on French economic growth in the coming months.

On Wednesday, March 25, another ratings agency, Moody’s, had forecast that the world’s 20 most industrialized countries would likely suffer a recession this year because of the COVID-19 pandemic. 

It estimated that the G20’s overall GDP would contract by 0.5%, with the US economy shrinking by 2% and the eurozone by 2.2%.

China, however, despite suffering an outbreak of the novel coronavirus before everyone else, could see economic activity expand by 3.3%, a level that is nonetheless well below average for the world’s second biggest economy.

G20 leaders are to hold an online summit on Thursday after criticism the group has been slow to address the crisis.

Banking woes

Separately, Moody’s said it was downgrading its outlook for the banking sectors of 6 European countries in light of the economic fallout from COVID-19.

Moody’s said that it had cut the outlook for banks in France, Italy, Spain, Denmark, the Netherlands, and Belgium from “stable” to “negative.”

And it was also maintaining its “negative” outlook for the banking sectors of Germany and Britain.

Only in Switzerland and in Sweden was the outlook “stable,” Moody’s said. 

“The changes reflect Moody’s expectation that the spread of the coronavirus in Europe, which has resulted in widespread business closures and restrictions on social interactions, will hit economic activity this year,” it said.

“Within this environment, banks’ problem loans will increase, while higher loan loss provisions will reduce banks’ profitability, which is already low compared to global peers.”

Nonetheless, “in most banking systems, liquidity is strong and capital buffers are substantial, providing a solid base to absorb unexpected losses,” Moody’s noted. – Rappler.com