LONDON, May 13, 2020 /PRNewswire/ -- India is expected to enter recession following the quarantine imposed on the world's second most populous country.
The recent plunge in the PMI activity index highlights the huge economic costs of lockdown. But the worst is yet to come. We expect GDP growth to contract by 0.9% in 2020, well below the 7% norm of recent years. Risks are numerous should the accumulated structural weakness backfire during this unprecedented crisis.
Recession peaks as consumption troughs
As the world pressed the "pause" button by imposing lockdowns, growth has been brought to a halt. India is no exception. A recession is now expected in the subcontinent in 2020. We currently forecast Indian GDP growth to contract by 0.9% y/y in 2020, compared with our forecast of growth of 4% y/y in March. We have sharply cut the forecast published in our April report as a result of (i) the general lockdown from March 25, limiting the movement of 1.3 billion people, and (ii) the weak overall government response amidst intrinsic structural economic weaknesses in India.
Before the lockdown we had expected GDP to grow at 4% y/y in 2020 and to drop to 2.9% y/y in Q2. This was driven by a reduction in fixed investment and stock-building. However, since the "stay-at-home" orders have been put into effect, and now extended to May 17, we expect consumption growth to be much weaker. This is because lockdowns are preventing households from spending. Investment is also expected to make a negative contribution to GDP growth, as companies face a large degree of uncertainty about the future and so delay or cancel investment projects.
We now expect a contraction of 4.3% y/y in GDP in Q2, and 1.36% y/y in Q3. These quarterly contractions would be the worst since such official data were released in the early 1990s. A return to growth is likely in the last quarter of 2020 followed by a strong recovery in 2021 at 7.6%. This recession should be U-shaped since we expect a return to trend growth rates within a year but a permanent loss in the level of output.
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