Economic momentum will be lost through 2021: CLSA

India has the weakest growth in fiscal 2020 of countries that we forecast at 15 per cent, but the strongest fiscal 2021 forecast at +14.5 per cent, CLSA said

As sporadic lockdowns pick up pace across major developed economies given the second wave of Covid-19 pandemic, growth in emerging markets is likely to be more resilient, said ERIC FISHWICK, chief economist at CLSA and ANTHONY NAFTE, their senior economist in an interview with Puneet Wadhwa on the sidelines of 23rd CITIC CLSA Annual India Forum. India, CLSA said, will have the weakest growth in fiscal 2020 in the Asian region, but the strongest growth in fiscal 2021. Edited excerpts:

What are your expectations for global growth in 2020, 2021? Is the recovery done till now sustainable?

Fishwick: Growth in developed economies will weaken in the fourth quarter of calendar year 2020 (Q4-20) and the first quarter of calendar year 2021 (Q1-21) because of the second wave of Covid-19. This is already visible in European data where lockdowns are being re-imposed at the national level. It is only a matter of time before US data softens as state-level lockdowns are now starting to be re-imposed. The consensus is too optimistic on 2020 growth in developed economies for this reason. Growth in emerging markets is likely to be more resilient, as they are more recent in their emergence from the Covid-19 ‘first wave’.

Assuming a vaccine is distributed through 2021, it is almost inevitable that 2021 will see extremely strong gross domestic product (GDP) growth numbers. Our Asia ex-Japan (AxJ) and G3 forecasts for 2021 are the strongest for a decade. However, it is the nature of rebounds from economic shocks that the sequential pace of growth slackens. This will be hidden by base effects in year-on-year growth numbers, but is already visible in leading countries’ month-on-month or quarter-on-quarter data profiles. Despite very robust growth headlines, economic momentum will be lost through 2021 and we see 2022 as a weak year. The output gaps opened up because of Covid-19 will not be fully closed.

How do you see global central banks, especially the US Federal Reserve, respond to the recent developments?

Fishwick: There has been a clear shift in how central banks look at their inflation and employment mandates in the persistent low inflation environment of the 2010s. This has been to move from regarding low inflation as a target, to it being regarded as a problem. This, therefore, means that it would take a significant inflation shock, which we do not forecast, to cause the present monetary accommodation to be withdrawn.

We do not envisage any tightening from the US Fed to at least the end of 2022. This looseness extends to all of our other monetary policy forecasts. India and Indonesia will cut rates further to mid-2022. Other Asian countries are closer to the end of their rate cutting cycles but no one will want to be first to tighten. We do not forecast any tightening from any Asia-ex-Japan central bank before the end of 2022.

How are the economic policies under the new US president likely to shape up?

Fishwick: Biden should be positive for US-China trade relations relative to what would have been expected had Trump been re-elected. However, I would warn against expecting too dovish an attitude from Biden. First, he is likely to be bandwidth-limited and domestic legislation will command his attention. This argues against expecting too much Trump-era trade legislation being reversed quickly. Second, the hardening of US attitudes to China has happened across the political spectrum.

Outside of US-China relations, the most significant policy action for Asia would be if Biden were to rejoin the Trans-Pacific Partnership (TPP). This trade agreement is far superior to Regional Comprehensive Economic Partnership (RCEP) and Biden’s more inclusive multilateralism would favour US participation. Rejoining TPP would be a powerful signal of committed US engagement with the region as a counterbalance to China. Realistically though, this will likely be at the low end of his priorities. On the other hand, the need to counter China’s increasing dominance in the region will provide Biden with a compelling argument for rejoining TPP, when the opportunity arises.

What are your projections for economic growth in India over the next few quarters and in calendar year 2020 and 2021?

Nafte: Pending the third quarter (Q3-20) GDP data which may only be released next month, we estimate a 13.2 per cent GDP contraction in calendar year 2020 and a rebound to 12.3 per cent growth in 2021. Consumer price (CPI) inflation was at 7.6 per cent YoY in October, which we expect to fall to 5.3 per cent by March 2021 and to 4 per cent by March 2022. This corresponds to a fall in average inflation from 6 per cent in FY21 to 4.2 per cent in FY22. Expect the rupee to hold at the current 74.5/USD level until end-December 2020 and forecast a 7.5 per cent depreciation to 80.5/USD by end-December 2021.

How does India compare with other Asian and emerging market peers in terms of economic growth projections for the next couple of years?

Nafte: The near-term forecast is driven by the weakness of the economy this year and the corresponding strength of the 2021 rebound. India has the weakest growth in fiscal 2020 of countries that we forecast at 15 per cent, but the strongest fiscal 2021 forecast at +14.5 per cent.

India’s young demographic means that trend/cycle average growth is the strongest of any Asian countries that we forecast (around 7 per cent, China’s trend growth is now around 5.5 per cent, Indonesia 5 per cent, Philippines ~6 per cent). Add in the attractions of market scale – and India will continue to be a positive outlier in the emerging market space. In a slow global growth period (such as the post-GFC decade and the decade that we forecast will follow COVID), India also has the advantage of being internally- rather than externally-driven. Accordingly, it is able to offer attractive investment returns in an adverse global growth and weak commodity price environment.

For India to realise its growth potential, it needs to move forward with economic restructuring. Specifically, fiscal rationalisation will require that there is no backtracking on state owned enterprise privatisation; effective financial sector intermediation will require recapitalisation of the banking sector, which includes divestment of public sector banks.

How do you view India's decision to refrain from joining RCEP?

Nafte: We view this negatively. India will miss out on the economic benefits of joining the regional trade agreements, both the RCEP and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) The Peterson Institute for International Economics estimates that India would have gained $60 billion by joining RCEP, underlining that it was an expensive decision to stay out of the trade pact. India will eventually, one day, recognize the counterproductive implications of its protectionist trade policy. Its exclusion from both regional trade agreements will gradually erode its competitiveness.

The government has announced a slew of policy reforms and stimulus measures under the ‘Atmanirbhar Bharat’ umbrella. What’s your view on the same?

Nafte: The scheme is appropriate for boosting employment by giving companies an incentive to hire (or rehire) workers. The scheme will add to the fiscal burden though, reinforcing the need to move expeditiously with privatisation in order to boost fiscal revenues.