Moody’s Sees Potential Recovery in 2nd Half of 2020

The U.S. government’s economic policy response to the coronavirus could pave the way for a recovery in the second half of 2020 though downside risks to growth remain high, according to Moody’s Investor Service.

In a report released on Monday, Moody’s said the fiscal and monetary response of the federal government, most notably the $2 trillion CARES Act emergency relief package, and Federal Reserve has been “aggressive in size and scope” even when compared to the global financial crisis.

“We expect these measures to help limit the depth of the economic shock and provide conditions for a potential recovery in the second half of the year,” assuming containment measures are effective and mandatory lockdowns are concluded by the end of the second quarter, the report said.

However, it added, downside risks to growth remain high as the spread of the virus and duration of lockdowns remain “highly uncertain,” with “significantly wider fiscal deficits and faster debt accumulation, driven by the very large fiscal response so far” weighing on the U.S.’s fiscal strength and sovereign credit profile.

Moody’s is now forecasting real GDP will contract by about 2.0{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} in 2020 and the federal fiscal deficit will increase to nearly 15{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of GDP from 4.6{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} last year, reflecting not only higher spending but also lower tax revenues due to the economic contraction.

In addition to the CARES Act, the policy response to the coronavirus has included the Fed’s moves to cut interest rates and provide emergency credit facilities. “Should economic conditions deteriorate further, we expect the Fed to deploy more programs to support financial markets and the economy,” Moody’s said.

The credit rating service also noted that small businesses are on “the frontline of exposure to the crisis” because, among other things, they face tighter cash flow positions and more limited access to credit than large companies.

“We see potential implementation risks with new programs intended to support SMEs through loans and guarantees, as these could face more onerous loan terms, approval processes, and other administrative and bureaucratic challenges that could slow or impede implementation, thereby diluting their effectiveness,” Moody’s warned.

CARES Act, economic growth, federal deficit, Federal Reserve, monetary policy, Moody’s Investor Service, Small Businesses