S&P cuts U.S. growth forecast again as virus spreads

S&P cuts U.S. growth forecast again as virus spreads

SYDNEY (Reuters) – A rapidly spreading coronavirus outbreak will likely be a “material headwind” for the U.S. economy with the hit expected to be longer and deeper than previously anticipated, S&P Global Ratings said on Tuesday as it cut its growth forecast.

The epidemic is plunging the world economy into its worst downturn since the global financial crisis more than 10 years ago, the Organisation for Economic Cooperation and Development warned on Monday, urging governments and central banks to fight back to avoid an even steeper slump.

In a bid to shield the world’s largest economy from the coronavirus, the U.S. Federal Reserve on Tuesday cut interest rates by half a percentage point to a target range of 1.00% to 1.25%. Also on Tuesday, Australia’s central bank cut interest rates to a record low 0.5%.

S&P had earlier expected U.S. GDP growth in the first quarter would be closer to 1% than its pre-virus forecast of 2.2%, with a recovery in subsequent quarters.

Now it forecasts second-quarter growth would also come in closer to 1%, S&P’s U.S. chief economist Beth Ann Bovina wrote in a note.

“We do not know the extent of the duration of the virus, nor do we know what hitches we may hit along the way,” she wrote.

“As such, this forecast update is based on our evolving belief that the headwind on U.S. economic growth will likely extend into the second quarter and could be worse than our earlier estimate.”

The forecasts also reflected the suspension of Boeing (NYSE:) 737 MAX production and exports, she added.

The hit to U.S. growth would come through five main channels – interruptions to travel and tourism, weaker demand from China and rest of the world, disruptions to supply chains, reduced private spending and lower commodity prices.

China is the United States’ third-largest trading partner, making up 13.5% of total trade with the country.

“Clearly it is going to be more of an issue from a supply chain perspective (imports) rather than exports because American export exposure to China as a share of GDP is only 0.6% while imports from China make up almost 3% of GDP,” Bovina added.

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