COVID-19 Lockdown Impact: Fitch Ratings says Indian economy to contract 5% in FY21; forecasts global GDP to fall by 4.6% in 2020

Fitch Ratings on Tuesday forecast the Indian economy to contract 5 percent in the current fiscal on account of the slump in economic activities following a 'very severe' lockdown that has lasted much longer than expected

FP Staff May 27, 2020 13:06:23 IST
COVID-19 Lockdown Impact: Fitch Ratings says Indian economy to contract 5% in FY21; forecasts global GDP to fall by 4.6% in 2020

Fitch Ratings on Tuesday forecast the Indian economy to contract 5 percent in the current fiscal on account of the slump in economic activities following a "very severe" lockdown that has lasted much longer than expected.

Similar predictions were made about the Indian economy by CRISIL, Moody's. Golman Sachs among others.

In its Global Economic Outlook (GEO) for May, Fitch projected growth to rebound to 9.5 percent in 2021-22 and an estimated 3.9 percent growth in 2019-20.

The forecast of 5 percent contraction is a sharp decline from 0.8 percent growth projected by the global rating agency in late April.

"The biggest contribution to the downward revision in global GDP for 2020 comes from EM (emerging markets) excluding China, where we now see GDP falling by 5 percent in India and Russia and by 6-7 percent in Brazil and Mexico," Fitch said, according to a PTI report.

This reflects the surge in coronavirus infections from mid-April and measures taken to contain the outbreak, it added.

"The biggest revision by far has been for India, where the virus outbreak has prompted a very severe lockdown that has lasted much longer than expected," the rating agency said.

It predicted two consecutive quarters of contraction or negative year-on-year growth in current fiscal -- (-)2.7 percent in April-June and (-)12.4 percent in July-September. This compares to 1.2 percent estimated growth in January-March.

Click here to follow LIVE news and updates on stock markets

Fitch said the growth contraction in the current fiscal was mainly due to a 8.3 percent and 9.7 percent contraction in consumer spending and fixed investment in FY21.

While Fitch further cut world GDP forecasts in its latest Global Economic Outlook (GEO), but said that the slump in global economic activity is close to reaching its trough.

"World GDP is now forecast to fall by 4.6 percent in 2020 compared to a decline of 3.9 percent predicted in our late-April GEO. This reflects downward revisions to the eurozone and the UK and, most significantly, to emerging markets (EM) excluding China," said Brian Coulton, Chief Economist, Fitch Ratings.

Fitch expects output in emerging markets, excluding China, to fall by 4.5 percent this year compared to a predicted fall of 1.9 percent before. This large revision reflects the deterioration in the health crisis in many of the largest EMs over the past month or so, including in Brazil, India and Russia, it said.

Click here to follow LIVE updates on coronavirus outbreak

"The biggest forecast cut was to India where we now anticipate a 5 percent decline in the current financial year (ending March 2021) in contrast to an earlier forecast of growth of 0.8 percent. India has had a very stringent lockdown policy that has lasted a lot longer than initially expected and incoming economic activity data have been spectacularly weak," Fitch said.

The agency has kept its forecasts for 2020 GDP growth for China, the US and Japan unchanged since late April at 0.7 percent, (-)5.6 percent and (-)5 percent, respectively.

"This concurs with other evidence that the collapse in global economic activity may be close to bottoming out. A number of early monthly economic indicators for May have improved slightly on their April values and daily mobility data show consumer visits to retail and recreation venues have increased in the eurozone and the US since lockdowns started to be eased in late April/early May," Fitch said.

Fitch said global macroeconomic policy stimulus has been increased further over the past month or so, beyond the already announced huge commitments.

The US has announced an additional fiscal package valued at more than 2 percent of GDP (with more being discussed), Italy unveiled a second wave of easing measures, the UK extended its job-subsidy scheme, and Fitch now expects China's general government fiscal deficit to widen to 11.2 percent in 2020 from 4.9 percent in 2019.

Fitch predicts that global quantitative easing (QE) will reach USD 6 trillion in 2020, equivalent to half of the cumulative QE purchases by the Fed, ECB, Bank of England and Bank of Japan combined in 2009-2018.

This explosion in central bank liquidity has helped to secure a pick-up in bank credit to the real economy (specifically, to firms) in the past couple of months, a development that contrasts with the pattern in 2009, it said.

Fitch said the return to economic normality is likely to be a slow and bumpy process. The rupture in the labour market - with US unemployment now expected to peak at 20 percent in May - and ongoing social distancing will weigh heavily on consumer spending post-crisis, while firms will be very cautious on capital spending.

"We foresee a 'technical' pick-up in global GDP growth to 5.1 percent in 2021 - with US and eurozone output rising by around 4 percent - but pre-virus levels of GDP are unlikely to be reached until mid-2022 in the US and significantly later in Europe. This is despite massive policy stimulus," Coulton added.

Economy to contract, say others

CRISIL predicted the economy will to shrink by 5 percent in the current fiscal because of coronavirus lockdown. It said, this would be India's fourth recession since Independence, the first since liberalisation and perhaps the worst to date.

Moody's Investors Service on Friday said India's economy is expected to contract for the first time in more than four decades saying economic damage owing to the coronavirus-induced lockdown will be significant with lower consumption and sluggish business activity.

American brokerage Goldman Sachs expects the Indian economy to contract by 5 percent in FY21, making it the worst performance by the country ever.

The brokerage said the GDP will contract by a mind-boggling 45 percent in the June quarter as compared to the January-March period on an annualised basis, because of the continuing lockdown which is chilling economic activity, before recovering later.

The economy is likely to have expanded at its slowest pace in at least eight years in the January-March quarter, partly as a result of the coronavirus clampdown, a Reuters poll predicted.

---With inputs from agencies

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

With over 70,000 COVID-19 cases, Delhi surpasses Mumbai to become worst-hit city in India
India

With over 70,000 COVID-19 cases, Delhi surpasses Mumbai to become worst-hit city in India

With 3,788 fresh cases, Delhi's COVID-19 tally rose to over 70,000 on Wednesday, surpassing Mumbai to become the worst hit city in India

Coronavirus Outbreak: Member of Maharashtra govt's COVID-19 task force tests positive
India

Coronavirus Outbreak: Member of Maharashtra govt's COVID-19 task force tests positive

The task force of nine senior doctors was formed on 13 April in view of increasing number of coronavirus cases and deaths in the state, especially in Mumbai.

Coronavirus Updates: Confirmed cases in Maharashtra cross two lakh with 7,074 new infections reported today; toll reaches 8,671
India

Coronavirus Updates: Confirmed cases in Maharashtra cross two lakh with 7,074 new infections reported today; toll reaches 8,671

Coronavirus Updates: According to a state health department bulletin, over 1.98 lakh patients have been discharged till date and the recovery rate stands at 54.02 percent