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Indian economy can contract 2.6%; US over 11% in worst case in 2020: Nomura

In its worst case projection, Nomura expects GDP growth in Q2 to fall to -10.3 per cent y-o-y. (Illustration: Ajay Mohanty)
The coronavirus (Covid-19) pandemic is likely to hit the global economy, including India, hard over the next few months. With nearly 75 per cent of the Indian economy in lockdown mode, Nomura has lowered the 2020 GDP growth forecast to -0.5 per cent year-on-year (y-o-y) from 4.5 per cent.

“We now expect GDP growth to slide from 4.7 per cent y-o-y in Q4 2019 to 3.1 per cent in Q1 and plunge to -6.1 per cent in Q2, when both domestic and external demand will weaken. We are building in a sequential pickup in the second half of 2020, but the pace of recovery is likely to be much weaker given some lasting damage to potential output,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi titled 'COVID-19’s impact on the world economy'.

In its worst case projection if the Covid-19 pandemic becomes a full-blown credit crisis for India, corporates find it difficult to stay afloat, and banks struggle with the balance sheet fallout, Nomura expects GDP growth in Q2 to fall to -10.3 per cent y-o-y and - 1.5 per cent in H2-2020. That apart, rising unemployment, loss of income and disenchantment against the draconian measures may even lead to social unrest, Nomura says.

The Reserve Bank of India (RBI), it feels, will likely deliver another around 100 basis points (bps) of policy easing, even though inflation may face some upside risk from food and medical good shortages due to prolonged shutdowns. Fiscal deficit, amid these measures, Nomura says, could still slip to 5.5 – 6 per cent of GDP versus the 3.5 per cent target for FY21.

On the other hand, if things turn out to be better than expected and the 21-day lockdown in India is lifted as announced, the GDP growth then would slow from 3.1 per cent y-o-y in Q1 to -5.1 per cent in Q2 and average at 2.3 per cent in H2-2020.

US, Euro area economies to suffer most

At the global level, Nomura sees the US and Euro area economies to suffer the most due to the Covid-19 pandemic. Based on the experience of other countries, the COVID-19 outbreak, it feels, in the United States still appears to be in an early stage. In the worst-case scenario, Nomura expects the recovery in H2 to be even more lacklustre and the recession to last longer.

Recently, the White House said US' peak death toll from the coronavirus is likely in two weeks and in a worst case scenario, a total of 100,000 to 200,000 Americans could eventually succumb to the virus.

In the worst-case scenario, Nomura believes there could be more significant credit losses, greater stress on the financial system and tighter financial conditions in H2 2020. “In this case, we would expect year-on-year growth of -11.3 per cent in 2020,” wrote Lewis Alexander, Nomura's chief US economist in the anchor report.

As for monetary policy, there is not much more that they expect from the Bank of England (BoE) and the European Central Bank (ECB). That said, Nomura expects the US Federal Reserve (US Fed) to keep short-term rates at current levels (0 – 0.25 per cent) at least through the end of 2021.

“The Fed may include purchases of short-dated municipal securities. In addition, they are likely to release more detail on a ‘Main Street Business Lending Program’ aimed at lending to small and medium-sized businesses. Finally, the Fed is also likely to use additional credit protection from Treasury to expand their current emergency credit facilities by expanding the list of eligible assets, terms and counterparties," the Nomura report said.

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