Global research and brokerage firm Nomura has lowered its growth projections for India for the year 2020 to 6.9 per cent from the earlier projected 7.1 per cent, and sees more rate cuts by the Reserve Bank of India (RBI) going ahead. It expects Asia ex-Japan’s growth slowdown to continue until the fourth quarter of 2019 (Q4-2019), due to trade tensions, the tech down-cycle and a slowing Chinese economy.
“Amid the slowdown, there are signs of growing divergences within the region, with Vietnam, Taiwan and Malaysia benefitting from the diversion of trade away from China. We are lowering our 2020 growth forecast for India, given tighter financial conditions, and see downside risks to our growth forecasts in South Korea, Thailand, Singapore and Indonesia,” wrote analysts at Nomura in their special report titled ‘The world economy: Nearing an inflection point’.
That said, Nomura expects a gradual growth recovery to set in in the latter part of 2020, as Asian economies benefit from ongoing policy easing and a potential capex recovery in the tech sector. As regards interest rates, it expects the RBI to cut rates by 25 basis points (bps) in its October policy meet, instead of a 15 bps cut forecast earlier.
“Policymakers across Asia would likely respond with bigger stimulus in an attempt to offset the downward spiral via frontloaded and larger rate cuts, including to below historical lows in Thailand and South Korea; unconventional monetary policies (South Korea); fiscal stimulus across all countries (including India and Malaysia); and easier macro-prudential policies,” the Nomura report says.
At the global level, an escalation in the ongoing trade war between the US and China, the report says, can see the global growth for 2020 dip to 3.3 per cent in the wort-case scenario, and will start to have non-linear effects amid the economic slowdown via feedback loops (between slowing growth and tightening of financial conditions), spill overs (to services and consumption) and amplifiers (corporate credit stress).
"In this scenario, the US experiences a mini recession (like in 1991 and 2001, not 2008). The US Fed cuts rates to near zero per cent, and restarts unconventional policies, probably yield curve control like the Bank of Japan (BOJ). Payroll taxes will likely be cut but a large, swift fiscal stimulus is unlikely due to politics," Nomura says.
On the flip side, it expects the US Fed to only cut once more in September, and start hiking late in 2020 in case the trade tensions ease and the global economic indicators start to improve. As a result, there could be a strong rebound in business confidence and easing in financial conditions, and the potency of very low policy interest rates increases.
"The risk-on hunt for yield returns to emerging markets (EM); in Asia, capital inflows are particularly robust to India, Indonesia and the Philippines," the Nomura reports says.