US economy will recover but Covid-19 bruises will last several years: Moody's
Mar 30, 2021
New York [USA], March 30 : Moody's Investors Service expects US economic activity as measured by GDP to return to its pre-coronavirus path by the end of 2021, but an elevated unemployment rate and a lagging recovery in the hardest hit sectors will leave visible bruises.
Moreover, the legacy of higher government and corporate debt is likely to last for several years, said Moody's in its latest credit outlook.
As Covid-19 vaccinations increase and pandemic-related disruptions fade, several factors augur GDP recovery to the pre-Covid-19 path by year-end. The economic downturn has not stressed financial sector. It does not result from a burst credit or real estate bubble. And pandemic-related supply disruptions will pass.
After a financial crisis, Moody's said recovery is typically slow because damage to banking system balance sheets keeps banks from providing credit to the economy for years afterwards.
Similarly, when a burst credit or real estate bubble damages corporate and household balance sheets, repair takes years of deleveraging. Aided by unprecedented government stimulus and central bank support, Moody's expects a strong rebound of the US economy so that by mid this year, US GDP will have surpassed its year-end 2019 level.
In 2020, the number of bankruptcy filings and defaults was more limited than in previous economic recessions. For example, the trailing 12-month global speculative-grade corporate default rate peaked at 6.8 per cent in December 2020 compared to a peak of 13.3 per cent in 2009, 9.7 per cent in May 2002 and 12.3 per cent in June 1991.
Pandemic disruptions are creating losses on capital stock (for example, hotels and aircraft) but these are a small share of the economy and the disruptions are also spurring new investment in digital technologies, said Moody's.
Once the pandemic has receded and lockdown measures are rare, consumers will regain confidence. Businesses in the hardest-hit sectors like restaurants, travel and tourism-related sectors will begin to recover but at differing paces.
For high-contact travel and tourism-related sectors, recovery will likely lag until anxiety about coronavirus wanes and international restrictions are lifted.
Other high-contact service sectors including retail, healthcare and education accelerated their digitisation amid pandemic lockdowns. Their recovery will be faster but requires the labour force to re-skill for the new digital economy which will take time.
One sustained legacy of the pandemic will be higher government and corporate debt which will likely weigh on growth over the next five to 10 years. In the next two years, central banks will manage the debt burden with low interest rates and tolerance for periods of higher inflation,
But over time, if governments and companies need to direct funds to repaying debt rather than toward investments, it will constrain economic growth. Unfavourable demographic trends and slowing productivity growth have reduced the US trend growth for decades before the pandemic.
Population growth will continue to slow and productivity growth is likely to remain low. Whether digitisation and advances in robotics and artificial intelligence can significantly boost productivity growth remains uncertain, said Moody's.
