COVID-19 to push eurozone and UK into recession – S&P

The economic costs of the coronavirus pandemic for Europe are mounting quickly as measures to contain the virus increase, both in Europe and abroad, according to ratings agency S&P.

Its latest European economic forecast, COVID-19: The Steepening Cost To The Eurozone And U.K. Economies, states that the relatively swift recovery expected to start in the second half of 2020 will still take time, as job losses and uncertainty will slow the return to previous levels of consumption, investment, and trade.

"Risks to our forecast are skewed to the downside: the pandemic might last longer and be more widespread than we currently envisage. The size and kind of policy responses countries take now are key to avoiding permanent economic damage later," S&P Global Ratings' EMEA chief economist Sylvain Broyer said.

S&P notes that most of the multiple shocks to the European economy are growing, such as the shock to demand, both internal and external, and the shock to supply. And then, there is the shock to confidence from a sharp tightening in financial conditions and uncertainty about the length of isolation measures. Only monetary conditions have stabilised since S&P’s last assessment.

S&P Global Ratings acknowledges a high degree of uncertainty about the rate of spread and peak of the coronavirus outbreak. Some government authorities estimate the pandemic will peak around midyear, and S&P is using this assumption in assessing the economic and credit implications. In S&P’s view, the measures adopted to contain COVID-90 have pushed the global economy into recession and could cause a surge of defaults among nonfinancial corporate borrowers.

Central banks and governments have deployed a flurry of unprecedentedly large fiscal and monetary policy packages to help workers and companies bridge the gap to recovery. 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 that swift and bold policy responses taken now are key to avoiding permanent losses to GDP later.

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