India’s growth may sharply fall 10.5% on long lockdowns, disruptions in economic activities: Fitch

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Fitch expects that the global GDP to fall by 4.4% in 2020, a modest upward revision from the 4.6% decline expected in the June GEO

Fitch Ratings has sharply cut India’s economic growth projection for the fiscal 2021 to (-) 10.5 percent from the previous assessment of (-) 5 percent in the wake of prolonged national lockdowns in the wake of COVID-19 outbreak which stalled the entire economic activities for months together.

There is a huge change in India forecast for the fiscal year-ending March 2021 (FY21) to -10.5 percent from -5 percent, the rating agency said.

“The 2020 China growth forecast is +2.7 percent compared with +1.2 percent in the June GEO. These revisions have been partly offset by cuts to our 2020 GDP forecasts for the eurozone to -9 percent (-8 percent), the UK to -11.5 percent (-9.0 percent) and for emerging markets (EM) excluding China to -5.7 percent (-4.7 percent). The latter primarily reflects a huge change in our India forecast for the fiscal year-ending March 2021 (FY21) to -10.5 percent from -5 percent.”

Fitch Ratings in its latest Global Economic Outlook (GEO) released on Tuesday expected the US economy to contract by 4.6 percent this year as compared to a decline of 5.6 percent in the June GEO.

Fitch expects that the global Gross Domestic Product (GDP) to fall by 4.4 percent in 2020, a modest upward revision from the 4.6 percent decline expected in the June GEO. The recovery in economic activity after the unprecedented severe coronavirus-related recession in March and April has been swifter than anticipated, but we expect the pace of expansion to moderate soon.

Official data have now revealed the extent of the economic dislocation in 2Q20 with world GDP falling by 8.9 percent Y-O-Y and many countries seeing falls in output of a fifth or more.

The UK, India, France, Italy and Spain stand out, having experienced stringent and/or lengthy lockdowns in 2Q20 which saw mobility (visits to retail and recreation venues) levels fall very sharply and 2Q20 GDP surprise on the downside compared with Fitch’s June GEO estimates.

"China has already regained its pre-virus level of GDP and retail sales in the US, France and the UK now exceed February levels, but we doubt this will become the much-lauded 'V'-shaped recovery. Unemployment shocks lie ahead in Europe, firms are cutting capex, and social distancing continues to directly constrain private-sector spending", said Brian Coulton, Chief Economist, Fitch Ratings.

In addition to its severity, the coronavirus-related recession was also very short, with activity falling precipitously in March and April before recovering quite quickly from May.

The transport and leisure sector - which typically accounts for 8-10 percent of GDP in the US and Europe - remains deeply depressed and has not undergone the post-lockdown recovery seen in manufacturing, construction or retail trade.

“It is expected that unemployment to rise significantly in 2H20 in the eurozone and the UK as job subsidies are scaled back and labour-intensive sectors, which are vulnerable to social distancing (including tourism), struggle,” the rating agency said.

Further fiscal policy easing announcements since June will help to offset the weakness in private demand but we see the recovery pace moderating from late-2020, such that the pre-virus level of GDP is not reached until 4Q21 in the US and 4Q22 in the eurozone.

"We still see the recovery path being decidedly 'swoosh'-shaped. Off the back of a two-month recession we think it will take 18 months from the low-point in April for the US to get back to 4Q19 GDP and 30 months in the eurozone", said Coulton.

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