Goldman Sachs revised global growth forecast for 2020 to -2% and that of US to -6%: Prachi Mishra

Goldman Sachs has come out with one of the most cautioning and warning notes we have read in recent times which makes a case that India’s growth may fall sub 2%. What are the indicators you are looking at which have turned green to amber or even red that is leading to that kind of a dire forecast?
This is an important input for our forecast for the Indian economy. Earlier during the year we were relatively optimistic about the global economy. Our global growth forecast for 2020 was 3.25% and our view was that the global
economy would be better in 2020 supported by easier financial conditions and an end to US-China trade war escalation.

Since then, however, our global view has changed completely. We have revised our global growth projections down sharply by more than 5% relative to a pre-virus situation. So our current global growth forecast for 2020 is minus 2%. Just to give you a sense of what the numbers look like for particular countries for the United States and for the Euro area, we have minus 6% and minus 9% respectively for 2020. If you look at quarterly numbers for the United States, we have a forecast of a 34% contraction in the level of real output in Q2 of 2020.

Let me then come to India, based on what the global economy would look like and let me say that in early March, when the virus situation was fairly benign in India, we revised down our growth forecast dramatically. Pre-virus our forecast was closer to 6%, in fact 5.8% for FY2021 (April 2020 to March 2021). Now, we are at 1.6%. This is a gigantic 4.20 bps downgrade.

There are three key reasons for this sharp downgrade compared to the pre-virus situation. Number one, as we have revised our global growth projections down by more than 5% relative to a pre-virus situation, this would definitely have implications for India growth and using elasticities of how much India growth would react to global growth, using historical data we have estimated this would be a roughly 150 bps downgrade for India growth.

Number two, what these forecasts do is they take into account directly the effect of the lockdown. Currently, we are in week three. We are basically assuming 25% of the activity would be wiped out in these three weeks and in addition, we are assuming and as seems to be the case now, there would be a staggered exit from the lockdown. If you take this into account, the fact that at least 25% of the activity would be wiped out during these three weeks and in addition there would be some sort of staggered exit from the lockdown, that would mean roughly around 220 bps reduction in growth.

And number three will be some additional spillover effects on investment.

You are saying that the cut in Indian growth numbers comes in a global backdrop of shrinking economic activity. How badly have the US and China been hit? What is the roadmap for them recovering?
As I said, for the United States in annual average terms we have a forecast of minus 6%. In fact, in Q2, there is a 34% contraction in real activity in the US. These are huge numbers. Similarly, across most countries, we have sharp quarterly contractions and quarter on quarter reduction in the level of real GDP in both Q1 and Q2.

How have you analyzed the policy measures? What kind of room do the global central banks have because this is a health crisis which is blowing up into an economic crisis. How have you compared China’s actions to that of the US central bank and policymakers? How do we as a country stack though we have rolled out just half of it and some more is expected?
As you correctly pointed out, this is truly an unprecedented shock globally and for the Indian economy. One key difference vis-à-vis some of the earlier episodes is that the whole fear and scare factor among citizens around the world was clearly not prevalent in any of the previous recession episodes.

The Covid-19 crisis is being dealt with by imposing lockdowns and social distancing. The response to the crisis represents a physical constraint on economic activity which is different from say a financial crisis where there is a shock to the financial sector. This kind of a shock is truly unprecedented in post war history. Whenever the constraint is physical, you actually see sharp contractions in economic activity as we are seeing across the world. We have forecast the same in Q2 as well.

Now coming to your questions on policy responses, given that the shock is unprecedented, policy responses need to be unprecedented too. First, this is a global health pandemic and so the first line of defence has to be to contain the spread of the virus and to deal with the infected population.

If you come to India now, both the centre and the state governments have been fairly proactive from the start and taken a number of steps in terms of screening people, closing borders, nation-wide lockdown since March 24th and this is likely to see an exit most likely in a staggered fashion. Going forward, we expect more measures to come.

Macroeconomic policy — be it a fiscal policy or a monetary policy– in a crisis like this can only be a second line of defence. Even in India, the RBI has cut interest rates by 75 bps ahead of its scheduled MPC meet and has taken a number of liquidity infusion measures. Going forward, we expect there would be more rate reductions. We have built in 50 bps more by the end of Q3 and this is due to three main reasons.

Number one, headline inflation is likely to come down. Number two, risks to our growth forecasts despite these sharp downgrades actually remain on the downside. Third, if you look at the RBI’s forward guidance, provided during the governor’s press briefing last time, it does suggest a space for further action as well.

When we come to the second pillar of macroeconomic policy which is fiscal policy, there is a lot of discussion that India does not have much fiscal space and how much fiscal response should be there. We have been saying this for a while. The public sector deficit net of asset sales for India is close to 10% of GDP. It remains the highest among emerging economies. So, no question about that. What is important to note however at this point is that these are more medium to long term arguments.

Right now, the economy is facing a globally unprecedented shock and the lack of fiscal space and that answers you question as well that India perhaps cannot have a fiscal response of 10-15% of GDP like many advanced economies have done. However, what I would like to stress in the Indian context is that rather than focusing on sheer magnitudes, what market participants are looking for is more whether the fiscal response is temporary, whether it is targeted, whether it is carefully calibrated and properly executed.

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