Fitch Downgrades Outlook Again as Pandemic Worsens

Agency sees ‘deep global recession,’ says immediate hit will be worse than global financial crisis.

The coronavirus pandemic has spread across the world so rapidly that Fitch Ratings has been forced to significantly downgrade its global economic outlook just two weeks after slashing its December outlook.

“The speed with which the coronavirus pandemic is evolving has necessitated another round of huge cuts to Fitch Ratings’ global GDP [gross domestic product] forecasts,” Fitch said in its most recent economic outlook report. “The forecast fall in global GDP for the year as a whole is on a par with the global financial crisis but the immediate hit to activity and jobs in 1H20 will be worse.”

In late March, Fitch nearly halved its baseline global growth forecast for 2020 to 1.3% from 2.5%. But with half the planet now in lockdown, Fitch expects world economic activity to be far worse than expected and forecasts it to swing from growth to contraction and decline 1.9% in 2020. It expects GDP to be down 3.3% in the United States and 4.2% in the eurozone, adding that China’s recovery will be “sharply curtailed” by the global recession and that it now only expects annual growth there of below 2%.

At the time it compiled its March outlook, only Spain and Italy had joined China in implementing full lockdowns, but “we now have to incorporate full-scale lockdowns across Europe and the US (and many other countries) in our baseline forecasts,” said Fitch, which now assumes lockdowns could reduce GDP in the EU and US by 7% to 8% respectively during the second quarter of 2020. Fitch said this would be “an unprecedented peacetime one-quarter fall in GDP,” and is similar to what it now estimates happened in China during the first quarter of this year.

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The new core assumptions used in Fitch’s calculations include a two- to three-month lockdown in key economies with a five- to six-week period of peak movement restrictions. It said this would result in a rapid and significant deterioration in the labor market and a sharp reduction in personal income with proportionate declines in demand for discretionary goods and services.

Fitch said there should be a “decent sequential recovery in growth” as lockdowns are removed, inventories are rebuilt, and policy stimulus packages take effect. However, this is assuming that the health crisis is mainly under control by the second half of the year, and even then the firm’s baseline does not see GDP rebounding to its pre-virus levels in the US and Europe until late next year.

As gloomy as the new forecast is, things might end up being even worse, according to Brian Coulton, Fitch’s chief economist, who told CIO that “the uncertainties surrounding these forecasts are extremely high and risks are on the downside.” He also said that it’s too late for a worldwide recession to be avoided, adding that “we are already there really. A deep global recession is now Fitch’s base case.”

Coulton told CIO that Fitch’s calculations suggest there would be an additional two percentage point decline in GDP over and above the baseline forecast in the US and Europe if the peak stringency lockdown period has to be extended to eight weeks and then removed more slowly than expected.

“This would also delay the return of GDP to pre-crisis levels,” he said, adding that the new forecast is predicated on the assumption that the health crisis eases in the second half of the year. “A failure to contain it would prolong the disruption—although a second wave may not be quite so disruptive to the economy as the first wave.”

However, he said, assuming the crisis eases in the second half of this year, “we should see quite a marked rebound in growth,” and the removal of lockdown measures should result in a discrete jump in activity, which is now being seen in China.

“Macro policy stimulus and inventory rebuilding should also contribute to a recovery,” Coulton said. “But the scale of the dislocation means we do not envisage GDP reaching pre-virus levels until late 2021.”

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Europeans Worry About Financial Future in Low Interest Rate Environment

A joint research paper concludes Europeans are most worried about their ability to save for retirement.

The low interest rates that many European countries’ central banks are switching to is impacting citizens’ perceived potential to save for retirement, their relationships within local banking institutions, and other factors, according to research from fintech firm Raisin and YouGov.

Most serious of the concerns regards their hope to save as much as they can before retirement. The survey noted that constituents across Ireland and Spain displayed the most concern regarding their financial future, followed by the relatively stronger economies of the UK and Germany.

“The respondents registered notable pessimism, with large majorities across all the countries surveyed questioning whether there is any point in saving at all,” Raisin said in a statement. “In France, the number is again lower, but, there, still 44% have lost confidence in the future of saving.”

France has shouldered its own retirement reform issues, prompting mass transit strikes across the country as opposition mounted against the government’s calls for a unified retirement system founded on a concept of “pension points” earned per day worked that are tradeable for benefits later on in life.

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A large number of the survey’s respondents believe that the low interest rate environment will continue into the foreseeable future, which might also be correlated with their distrust of local banking institutions, the survey said.

“Majorities across Europe trust banks less due to the low and negative interest rate environment,” Raisin said. “Half of the Brits asked said the situation decreases their trust in banks, while this share is even higher in Germany and France. In the Netherlands, Ireland, and Spain, a full two-thirds have lost significant faith in their financial institutions as a result of the long-term interest rate situation.”

The survey tracked various degrees of sympathy toward banks that have excess liquidity taken off their balance sheets from the European Central Bank, with the highest levels of sympathy being found in Ireland.

CEO Tamaz Georgadze of Raisin said the issue can be alleviated by opening the market for cross-border savings and investment offers. The Berlin-based company works to “break down barriers to better savings for European consumers.”

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