The decline here both in the markets and the macro economy is unprecedented': Economist

S&P Global Ratings Global Chief Economist Paul Gruenwald breaks down how the markets and economy are faring as the coronavirus outbreak continues to raise investor's fears.

Video Transcript

ADAM SHAPIRO: Jess, thank you very much. Just want to let you know the S&P 500 now up 45 points, Dow up 311 points, NASDAQ up 173 points. This news from Macy's about furloughing their employees hits home in regards to something our next guest, Paul Gruenwald, had written about. He is the S&P Global Ratings Global Chief economist.

And you had told us, Paul, that the government's tentative economic relief package would not be enough to fully offset the drag on second quarter economic activity. And then we get this news from Macy's, and it sure looks like we're setting up for an historic drop.

PAUL GRUENWALD: Yeah. Hi, Adam. We are predicting a very sharp drop in activity in the US. We've actually just revised our US GDP growth forecast down for this year to minus 1.3%. That should be around 12% decline in the second quarter. So we're seeing that pattern globally where we have one very large hit hopefully followed by a recovery.

You pointed to the labor market. I think this is going to be key, because the approach in the US seems to be that we're going to let the market work and then pay workers compensation and try to cushion the blow. The Europeans and the Asians tried-- seem to be trying to keep those employment-employee relations together, maybe get through the crisis, and then maybe have a quicker upturn. But that's something we're watching very closely on my team.

JULIE HYMAN: Hey, Paul. It's Julie here. I know you've also been looking at past recessions, right, to try to figure out, I guess extrapolate some things about this one.

So you looked at sort of average GDP decline, that the deep-- deep recession potentially that we're seeing now could result in a sharp GDP decline more than 5%. But since this at least feels unprecedented to many of us, how can you extrapolate, or what-- what-- what is useful to you in looking at those past examples?

PAUL GRUENWALD: Right. Well, this one's extremely difficult because it's not an economic crisis, right? It's a health crisis, and we have to map that into our economic variables. What we can say with very high degree of certainty right now is that the steepness of the decline here, both in the markets and the macro economy, is unprecedented.

So as I said, we're going to see double-digit declines in most-- most countries in the most affected quarter, and then hopefully a bit better after that. So we kind of know the direction at which all this is happening, but the speed is really a challenge for forecasters, and it's driven by the health numbers.

So like you guys we're watching the health numbers to see if we can get a flattening of the curve, we're looking at the measures in place. What sectors do those hit? Transportation, hospitality, we're seeing oil and gas decline, et cetera. So we're just trying to do our best to patch all that together, but we really don't have a template to forecast in this environment.

BRIAN CHEUNG: Hey, Paul. It's Brian Cheung here. Something that I've been really dialed into is just credit risk for right now. There's a lot of concern about all the strains that corporates are facing with just that Macy's news, for example, already a distressed company. What are you seeing on the ratings fronts for corporates, but also municipals, right? I mean, that seems to be a concern as more with companies being closed and not able to pay tax revenue.

PAUL GRUENWALD: Yeah. Well, my-- my ratings colleagues do the ratings. But we talk a lot about the macro credit together, and we've come out with some publications around that as well. I mean, obviously, the macro stress is going to lead to a lot of stress on credit worthiness. We're going to see a rise in default.

Those sectors I mentioned earlier are the ones that are being most heavily impacted. My-- my colleagues in the rating sides have already done a number of downgrades, certainly more to come there. But, again, mapping the macro into the credit, there's going to be some damage in the credit market because we're seeing such a huge and unprecedented drop in activity.

ANDY SERWER: When you talk about this unprecedented drop in activity, is there anything more that the-- the federal government can do? Because we have Mnuchin and the Secretary of the Treasury saying they stand ready to ask for more money, but would that really help?

PAUL GRUENWALD: Well, I guess we're kind of looking at the-- the-- the policymakers together with the-- with the monetary authorities and the fiscal authorities. I mean, the monetary authorities are trying to keep the financial system functioning, adequate liquidity, stock price discovery, making sure markets are orderly.

The fiscal side's really doing two things. One is to cushion the blow. So we talked a little bit already about the labor market, getting credit to SMEs. We may even have the Fed buying some-- some corporate high-grade debt. But it's really also not just cushioning the blow, but laying the foundation for the recovery.

This will eventually end. It will pick up. And again, we want to make sure those labor market relationships are still in place, the SMEs, as many as possible, are still up and running so that we don't have too much damage on the supply side. So when demand turns around, we can-- we can ramp up.

But the Fed's balance sheets are limited and the Fed can be-- the treasury can borrow at very low rates. So if this gets worse and that's our risk scenario, I would expect to see more.

JULIE HYMAN: Paul, speaking of coming out the other side, if we can believe the data and information coming out of China, they might be coming out the other side of this at this point. So what lessons can we draw from what's occurring there on the economic front?

PAUL GRUENWALD: Yeah. Well, we're looking at China. And just as an example, you saw big hits-- health hit in Wuhan province and Hubei province in the city of Wuhan, but not much elsewhere in the country. In the US, we're seeing this spread from Washington to New York and elsewhere. In Europe, we're seeing it spread from Italy to elsewhere, so I'm not sure China's a good model for this.

We do know from the activity data that China's starting to stabilize. We can look at the traffic patterns on TomTom.com. Everyone looks at that these days. FedEx is reporting a pickup. We're seeing industrial capacity pick up.

So activity there is recovering, maybe at a bit slower rate than we had previously thought. But I'm not convinced that China's a good template for the rest of the world. It's great that the economy that's been driving growth for the last decade's starting to turn around, but I think there's a lot more damage to come in the US and Europe. And, again, I'm not sure China's a good roadmap for that.

ANDY SERWER: All right. Paul Gruenwald, S&P Global Ratings Global Chief economist, good to have you here on Yahoo Finance. Thank you for joining us.