Thursday, June 18, 2020

Developing Asia to grow at the slowest pace since 1961

In the latest edition of ADO Supplement (June 2020), Asian Development Bank projected that developing Asia will grow by 0.1% in 2020 and then by 6.2% in 2021, thanks to a low base effect. This is a sharp downward revision from 2.2% projected in April edition of ADO 2020. 

Lockdowns and the associated decline in mobility outside home have constrained economic activities. External sector also doesn’t look that good because of a deeper contraction in the major advanced economies (the US, the Euro area, and Japan). 

The latest growth projections for developing Asia will be the lowest regional growth since 1961. Contraction is expected in all subregions except East Asia, where PRC and Taipei, China are projected to growth at a positive rate. 

However, recovery in 2021 will not be a V-shaped recovery as continued social distancing may be required amidst recurrent outbreaks. Furthermore, even if an economy succeeds in normalizing domestic activity, external demand will remain weak. ADB states that sovereign and financial crises cannot be ruled out, and social unrest is possible. US-PRC trade tension further exacerbates the situation

Uncertainty over the COVID-19 pandemic and the global recession will dampen economic sentiment in many economies. Some key drivers of growth such as tourism and exports (manufacturing) remain subdued.  

ADB projects growth in South Asia to contract by 3% and then recover at a rate of 4.9% in 2021. 
  • The Indian economy is expected to contract by 4% in FY2021 and then growth by 5% in FY2022.  PMI index fell to the lowest level in April, reflecting not so rosy outlook for FY2021. Unemployment and exodus of migrant workers from urban areas have dampened demand (perhaps, turn out to be structural as reverse migration may not again reverse as in the pre-COVID era).
  • Dip in export earnings and remittances will affect growth in Bangladesh, whose economy is expected to grow at 4.5% in FY2020 and recover to 7.5% in FY2021 (thanks to manufacturing output). 
  • Tourism, manufacturing and construction activities are expected to get hit in Bhutan, resulting in growth projection of 2.4% in FY2020 and then 1.7% in FY2021 (as labor shortages hit construction sector, which gets migrant workers from India). 
  • In Nepal, the government’s provisional estimate of growth for FY2020 is 2.3%, which will further decline as lockdown continue. Growth in FY2021 is projected at 3.1%.

Inflation will remain at low levels due to depressed demand and lower oil prices.