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S&P Warns Defaults Will Surge as World Enters Recession
A large “demand shock” to the economy is starting to unfold due to the coronavirus pandemic, S&P’s global chief economist warned Friday.
The coronavirus pandemic has pushed the world’s economy into a slowdown that may lead to default rates jumping as high as 10 percent in the next twelve months, according to analysts at S&P Global.
The macroeconomic outlook has quickly deteriorated since the outbreak of the coronavirus in China in December, with companies’ earnings expected to plummet in some sectors, S&P warned during a webcast Friday.
“Early data coming in seems to be even worse than expected,” Paul Gruenwald, S&P’s global chief economist, said during the webcast. “We are indeed already in a global recession.”
The sudden stop in global economic activity, the recent drop in oil prices, and record market volatility are all putting pressure on the creditworthiness of companies, according to Alexandra Dimitrijevic, S&P’s global head of research. She said companies rated B minus or below, meaning at least six levels below investment-grade, will suffer the most amid difficult funding markets.
Defaults rates could surge to 10 percent in the next 12 months, said Dimitrijevic, with the oil and gas, airline, and retail sectors being particularly vulnerable during the pandemic.
“The spread of the virus is accelerating, particularly in Europe and the U.S.,” Gruenwald said. S&P forecasts that U.S. gross domestic product will shrink this year between zero and 0.5 percent, with the Eurozone contracting as much as 1 percent. Global GDP will rise just 1 percent to 1.5 percent in 2020, according to S&P’s forecast.
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A large “demand shock” to the economy is starting to unfold as governments try to contain the virus, said Gruenwald. People are working from home, kids are kept from going to school, sports and entertainment events have been cancelled or postponed, and stores have closed, he said.
Markets have been reeling this month amid coronavirus virus fears. Corporate funding markets have frozen as investors shun risky, high-yield debt, according to Bank of America strategists. Investment-grade bond funds have also seen large outflows, with the bank’s credit strategist this week saying the corporate bond market is “basically broken.”
Meanwhile, the stock markets have plunged, including a more than 4 percent drop for the S&P 500 index on Friday.
“Central banks are focused on keeping markets orderly and injecting liquidity,” said Gruenwald. “Markets are moving very quickly.”