London-based Jan Lambregts, managing director (MD) and global head of financial markets research at Rabobank International, and Hugo Erken, senior economist and country analyst for North America, Mexico and India, share their views on the road ahead for the global financial markets and the economic forecast for India with Puneet Wadhwa. Edited excerpts:
Global financial markets have been roiled by the recent turn of events. Is the selling overdone?
Jan: Given the severity of the challenges posed by coronavirus (COVID-19) and the rapid way in which we are overtaken by events, the significant reaction we have seen in financial markets is not overdone. In recent years, we have grown used to every wobbly being met by government measures and this time around is no different. In fact, government measures are equally drastic, but this time around, the market is mostly judging policymakers actions to be more reflective of the scope of the scale of the problem rather than giving rise to any hope of a solution.
By when do you see stability returning?
Jan: The world is still trying to come to terms with the economic fall-out of this virus and stability isn’t around the immediate corner as we are trying to come to grips with it. It’s certainly not business as usual, and as such this isn’t an automatic “buying opportunity”. Policy rates across the world are being slashed to zero or negative, while bond yields have fallen rapidly in many countries due to safe haven demand as money flows outside of riskier assets. Yet with governments having to share much of the burden, the longer-term impact remains in question.
Can the coronavirus pandemic push the global economy into a recession?
Jan: A deep global recession is pretty much unavoidable as we ready to fight the war against this virus. Even before the virus broke out, we were looking for a mild recession globally, so we were hardly thinking the world economy was in good shape. This virus, though, is an outlier materialising and throwing any doubt out of the way. For many companies, earnings are in surreal territory and survival is going to be their foremost concern.
Are the global central banks justified in cutting policy rates, since coronavirus has created more of a supply-side problem and not a demand-side one?
Jan: We would argue the coronavirus is increasingly a simultaneous supply and demand shock. Central banks, alongside fiscal policymakers, are asked to intervene and act. But obviously, this is a problem they can help pave over the crack, but they can't fix the root source. Again, currently financial markets mostly judge their actions to be indicative of the scope of the problem, rather than offer a real solution.
What are your estimates for global economic growth?
Hugo: Our forecasts are surrounded with much uncertainty and there are several downward risks. That said, we expect global growth to level off to 0.7 per cent in 2020 (before corona we estimated 2.9 per cent). We expect China's growth to edge to zero in 2020 (pre-corona: 5.7 per cent). Most countries will end up in recession, with Japan -2.5 per cent (pre-corona: 0.5 per cent), Italy -1.9 per cent (pre-corona 0.1 per cent) and Germany -1.2 per cent (pre-corona 0.6 per cent). For India, we expect growth of 3.6 per cent in calendar 2020 (pre-corona 5.7 per cent). In terms of fiscal 2020-21, this is 4.2 per cent of growth.
How are investors viewing India as an investment destination now?
Hugo: India, like other emerging markets (EMs), is bearing the brunt of the global flight to safe assets. Our EM Vulnerability Heatmap shows that India at the moment is not one of the most vulnerable EMs, but also not one of the most attractive. There are some structural issues that the Modi government needs to fix in order to push economic growth again to acceptable levels (after the current crisis) and attract a sufficient amount of overseas investment. There is a possibility India might also benefit from the COVID-19 health scare. International firms have found out the hard way just how vulnerable their globally integrated supply chains are. This was already becoming clear due to the US-China trade tensions but has been exposed to the full by the COVID-19 outbreak. Firms want to rely less on China as their only manufacturing hub. They may shift (part of) their production to other countries, such as India. However, the extent of this potential upside is difficult to assess right now.