DBRS Morningstar, the US financial services and data firm, has said it considers that most advanced economies have adequate fiscal space to implement temporary measures to mitigate the adverse impact of the coronavirus in the short to medium term.
Morningstar, in a report released this morning, said the response to coronavirus places governments in a difficult dilemma. Efforts to slow the spread of the virus are needed to avoid overwhelming health care systems.
However, the immediate economic impact of aggressive social distancing and widespread travel restrictions cannot be fully offset in the near term, even with sizeable fiscal stimulus programs. The timing and vigor of economic recoveries will hinge on two considerations:
- Governments gradually easing travel and other restrictions while health care experts and providers come to the rescue with effective prevention and treatment options
- Effective monetary and fiscal stimulus measures
Support measures will have a cost and government financial balances look set to deteriorate across global sovereigns. To date, the measures outlined in our separate commentary appear sufficiently targeted and temporary to avoid any adverse rating implications.
The Morningstar report says the positive effects of these measures on prospects for an economic recovery combined with negative real interest rates across most of the major economies suggest the costs will be manageable. Nonetheless, a few of these sovereign ratings - and particularly those toward the left-hand side of the exhibits shown below - will necessarily rely on policies that preserve economic resilience and a medium-term commitment to fiscal consolidation.
The primary downside risk is that of an uncontainable outbreak with relatively ineffective treatment options, prolonged restrictions on travel and group gatherings, and a sustained rise in risk aversion and global savings. DBRS Morningstar says it considers this outcome unlikely, given past patterns associated with disease outbreaks. Nonetheless, a more prolonged shock would create increased risks of policy missteps or policy paralysis, which could yet pose risks to some sovereign ratings.
Economic fundamentals are also stronger across most of the major economies. Although growth in 2019 was relatively weak for most of the euro area countries and in Japan, these same economies have fully recovered from the financial crisis, with the exception of Italy, where DBRS Morningstar has concerns about the weak growth environment.
Among this group, per capita GDP growth has generally been higher in the less indebted economies (Exhibit 3). The United States nonetheless continues to stand out: a significant increase in indebtedness combined with a still large structural deficit has done little to reduce the dynamism of the US economy.
DBRS Morningstar views the US as having qualities of innovation and flexibility that put it in good stead to weather the crisis. Unemployment levels have come down considerably since their peak amid the global financial crisis.
With only a few exceptions (Spain, Italy), unemployment is today below its 2006 level. This is particularly true of Germany, as well as Japan, the Netherlands, Portugal and the United States. In addition, the financial excesses of the pre-global financial crisis years have not returned. Global banks have higher levels of capital and are better positioned to withstand a global downturn, Morningstar said.
The primary downside risk is that of an uncontainable outbreak with relatively ineffective treatment options, prolonged restrictions on travel and group gatherings, and a sustained rise in risk aversion and global savings. DBRS Morningstar says it considers this outcome unlikely, given past patterns associated with disease outbreaks."