The coronavirus (Covid-19) pandemic is likely to hit the global economy, including India, hard in the coming months. With nearly 75% of the Indian economy in lockdown mode, Nomura lowered the forecast for GDP growth for 2020 to -0.5% yoy (y-o-y) from 4.5%.
“We now expect GDP growth to decline from 4.7% year-on-year in the fourth quarter of 2019 to 3.1% in the first quarter and plunge to -6.1% in the second quarter, when both domestic and external demand will weaken. We expect a sequential recovery in the second half of 2020, but the pace of recovery should be much slower given the lasting damage to potential output, “wrote Sonal Varma, managing director and chief economist of India at Nomura in an author of a report with Aurodeep Nandi entitled “The impact of COVID-19 on the world economy”.
In its worst hypothesis, if the Covid-19 pandemic becomes a full-blown credit crisis for India, companies find it difficult to stay afloat and banks struggle with the fallout from the balance sheet, Nomura expects that GDP growth in Q2 falls to -10.3% a hundred years and – 1.5% in H2-2020. Other than that, rising unemployment, loss of income and disenchantment with draconian measures can even lead to social unrest, says Nomura.
Reserve Bank of India (RBI) says likely to ease policies by about 100 basis points (bps), although inflation may face upside risk from food and medical shortages due to prolonged closings. The budget deficit, in the midst of these measures, according to Nomura, could still slide to 5.5 – 6% of GDP against the target of 3.5% for fiscal year 21.
On the other hand, if things turn out better than expected and the 21-day blocking in India is lifted as announced, GDP growth would slow from 3.1% yoy in Q1 to -5.1% in Q2 and on average at 2.3% in H2-2020.
The United States and the euro area economies will suffer the most
Globally, Nomura is seeing the U.S. and eurozone economies suffer the most from the Covid-19 pandemic. Experience from other countries indicates that the COVID-19 epidemic in the United States appears to be at an early stage. In the worst case, Nomura expects the recovery in H2 to be even more lackluster and that the recession will last longer.
Recently, the White House said that the maximum number of deaths in the United States from the coronavirus is likely in two weeks, and in the worst case, 100,000 to 200,000 Americans could eventually succumb to the virus.
In the worst case, Nomura believes that there could be more credit losses, increased pressure on the financial system and tighter financial conditions in the second half of 2020. “In this case, we expect growth -11.3% annually. in 2020, “wrote Lewis Alexander, Nomura’s chief US economist in the anchor report.
As for monetary policy, they expect little more from the Bank of England (BoE) and the European Central Bank (ECB). That said, Nomura expects the US Federal Reserve (Fed) to keep short-term rates at current levels (0 – 0.25%) at least until the end of 2021.
“The Fed can include purchases of short-term municipal securities. In addition, they will likely publish more details on a “main street business loan program” to lend to small and medium businesses. Finally, the Fed is also likely to use additional credit protection from the Treasury to extend its current emergency credit facilities by expanding the list of eligible assets, conditions and counterparties, “according to the Nomura report.