Moody's cuts India growth forecast to 5.3% for 2020

Apart from supply chain disruptions, Moody's also expects consumption and investment to be affected and prices of oil and other commodities to remain around current lows until the end of June.

Moody's Investors Service on Monday cut its growth forecast for India to 5.3 per cent for 2020 from 5.4 per cent estimated earlier, as it expects the coronavirus outbreak to dampen domestic demand.

In its update on Global Macro Outlook for March, Moody's said the virus outbreak has spread rapidly outside China to a number of major economies.

"It now seems certain that even if the virus is steadily contained, the outbreak will dampen global economic activity well into Q2 of this year," it said.

Moody's baseline forecasts assume that the number of cases would keep increasing globally and there would be travel restrictions through the April-June period.

Apart from supply chain disruptions, it also expects consumption and investment to be affected and prices of oil and other commodities to remain around current lows until the end of June.

Accordingly, Moody's has revised growth forecasts for G20 economies to 2.1 per cent, 0.3 percentage point lower than the previous baseline.

 China's 2020 growth forecast has also been reduced to 4.8 per cent from the previous estimate of 5.2 per cent.

For the US, growth of 1.5 per cent is now expected, down from the previous estimate of 1.7 per cent.

For India, Moody's has projected growth at 5.3 per cent for 2020, lower than 5.4 per cent GDP expansion projected in February, taking into account baseline scenario of significant global disruption.

Moody's said baseline forecasts for this year are based on two assumptions -- the disruption of economic activity in the first half of this year will be followed by some recovery in global factory production and consumer demand in the second half; and warmer weather in the Northern Hemisphere in the spring and summer will weaken the spread of the virus.

"Since the publication of our last Global Macro Outlook update in mid-February, the coronavirus outbreak has spread rapidly outside China to a number of major economies including Korea, Iran, Italy, Japan, Germany, France and the US.

"Previously, we assessed the effects of the virus mainly on aggregate demand in China, global travel and global factory output resulting from disruptions in supply chains through East Asia," Moody's noted.

It is now clear that the shock will additionally dampen domestic demand globally, which will affect a wide range of non-traded activities across countries and regions simultaneously, it said.

Further, Moody's has also analysed the downside scenario of 'extensive and prolonged slump' in case of significant increase in coronavirus cases or increasing public fear that the virus will not be contained and oil price stays around $40-50 for 2020.

In such a downside scenario, Moody's expects India's growth to fall to 5 per cent in 2020, China (3.7 per cent) and the US (0.9 per cent).

Stating that global recession risks have risen, it said that the longer the outbreak affects economic activity, the demand shock will dominate and lead to recessionary dynamics.

"In particular, a sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment.

“Such conditions could ultimately feed self-sustaining recessionary dynamics. Heightened asset price volatility would magnify the shock," Moody's added.