Despite broad recovery, pandemic to leave ‘bruises’ on U.S. economy: Moody’s

U.S. economic output is expected to return to its pre-pandemic level later this year, but the episode will leave lasting scars on the economy, says Moody’s Investors Service.

In a new report, the rating agency examined whether the economic disruption inflicted by the Covid-19 pandemic has caused any permanent damage — a “hot topic among market participants.”

Moody’s said it believes the effects will last for years, notwithstanding a relatively quick recovery.

“We expect 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,” it said.

Additionally, the growth in both government and corporate debt is “likely to last for several years,” it said.

In the short term, though, Moody’s said the prospects for a return to pre-pandemic GDP levels this year look good. The downturn “has not stressed the financial sector, does not result from a burst credit or real estate bubble and pandemic-related supply disruptions will pass,” it said.

Typically, the recovery following a financial crisis or a burst real estate bubble takes a long time “because damage to banking system balance sheets keeps banks from providing credit to the economy for years” and it takes time to repair corporate and household balance sheets.

In this crisis, the number of bankruptcy filings and defaults has been lower than usual, Moody’s said.

“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,” it said.

“Once the pandemic has receded and lockdown measures are rare, consumers will regain confidence,” it noted.

That said, it also suggested that businesses in the hardest-hit sectors will take longer to recover.

“For high-contact travel and tourism-related sectors, recovery will likely lag until anxiety about coronavirus wanes and international restrictions are lifted,” it said.

The recovery will be faster in sectors such as retail, health care and education that pivoted to digital delivery during the pandemic, but the labour force will need to “re-skill for the new digital economy, which will take time,” Moody’s said.

Additionally, the report said that higher levels of corporate and government debt are one consequence of the pandemic that will last.

These elevated debt levels “will likely weigh on growth over the next five to 10 years,” it suggested.

“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 would constrain economic growth,” the report said.