Update Country Report Maldives 24 Aug 2020

India will publish GDP figures for the first quarter of fiscal year 2020/21 (April-June) on August 31st. They will capture the economic dislocation caused by lockdown measures to prevent the spread of the coronavirus (Covid-19), which were introduced on March 25th and applied stringently. The measures were eased moderately from late April and more substantively from June. However, localised containment zones were enforced, including in key economic areas, even as blanket measures were phased out.

As such, the GDP figures for April-June are likely to make grim reading. Over the period the monthly industrial production index fell on average by 35.9% from the same period of last year. The Economist Intelligence Unit's tracking of high-frequency indicators such as electricity consumption and mobility data has been consistent with this trend, showing a plunge in activity in April followed by only a partial rebound.

India's economic woes

Overall, we estimate that India's real GDP contracted by 22.8% quarter on quarter (or by 21.1% year on year) in April-June. This would push quarterly economic output back down to 2015 levels and would represent the worst performance by any major Asian economy over that period. Even before the pandemic, India's economy was growing at a rate below its potential, owing to the combination of a strained financial sector and slow progress on structural reform.

The prospects of a strong recuperation in activity are not encouraging. Purchasing managers' index readings for July failed to build on the rebound recorded in May and June, suggesting that the recovery has stabilised. A pick-up in employment has also begun to level off, as the effects of government-sponsored employment schemes and a spurt in seasonal agricultural hiring dissipate. While supply-side constraints have eased, the economy is held back by weakness in demand. Visits to retail and recreational establishments in August are around 50% lower than their pre-coronavirus levels, according to mobility data, as consumers remain wary about health risks. More broadly, consumption is being held back by job and income losses and a rise in precautionary saving.

The government is not in a strong position to boost demand. Its fiscal position is strained by low revenue collection and a budget deficit that had already widened before the crisis. Moreover, what resources the government does have may need to be focused on healthcare: India is recording around 450,000 confirmed coronavirus cases a week. An infrastructure package will be unveiled in the autumn, but we are expecting this additional spending only to run to the equivalent of around 1-1.5% of GDP.

A drawn-out economic recovery for the country seems likely. We are forecasting the economy to expand by 16.9% quarter on quarter in July-September as supply constraints ease, but this would be a weaker post-lockdown recovery than in other emerging economies, such as China. Moreover, sequential momentum will subsequently ebb, and in year-on-year terms real GDP will continue to contract until January-March 2021, with the economy slated to shrink by 8.5% in 2020/21 as a whole. A worsening of the already challenging health situation could prompt wider and stricter containment measures than those currently enforced, although this is not our baseline assumption at present.

The one bright spot from this may be that the government's lack of policy space could force it to implement growth-boosting reform measures such as streamlining labour laws, making land acquisition easier and privatising public-sector units. While some easing of regulations has been already conducted by the state governments, though the issuance of ordinances, further momentum for reform will be seen towards the end of 2020, when we expect the ruling Bharatiya Janata Party to gain a majority in the Rajya Sabha (the upper house of parliament).

Recurrent spikes become the norm

Elsewhere in Asia, the recent tightening of containment measures in response to fresh viral outbreaks in Australia, Hong Kong and the Philippines began to take effect, with the number of new cases in those territories starting to decelerate. However, the Philippine government's decision to relax restrictions in the capital, Manila, on August 19th risks derailing its progress in slowing new infections. India, Nepal and South Korea recorded large spikes in new infections in the past week.

The situation in South Korea is another reminder that countries are likely to experience recurrent spikes in coronavirus transmission, even if they have deployed effective containment measures, until a vaccine or treatment is made available (which we expect to be at end-2021 at the earliest). South Korea's mass testing and contact testing system was applauded internationally after the government brought its first wave of infections in February and March under control. However, the system has been proven to be not completely watertight.

There has been a triple-digit daily increase in infections in South Korea since August 14th, most of which were linked initially to a church in the capital, Seoul, but have since spread. In response, the government tightened its social distancing measures nationwide (escalating to Level 2 of its three-tier system) on August 23rd. If domestic daily new infections stay above 100 for longer than two weeks, social distancing requirements will be escalated to Level 3, meaning that the government would suspend public facilities and schools and recommend remote working where possible. While we have factored the risk of emerging new infections into our forecast that South Korea's real GDP will contract by 1.8% in 2020, the roll-out of Level 3 restrictions nationwide would prompt us to downgrade this figure further.

Nepal has suffered a sudden spike in coronavirus cases in late August, recording more than 5,000 new cases in the past week. The country lifted a four-month lockdown on July 21st, which led to increased rates of transmission among the population. The government subsequently reintroduced a curfew across most parts of the country, just as the Hindu festival season began with Hartalika Teej on August 21st. The authorities also decided to re-impose lockdown for a week in the Kathmandu Valley (where the capital is located) from August 19th. The government is facing criticism from the public for its perceived poor handling of the crisis, which has increased the risk of political instability. Factoring in the latest developments, we have revised our forecast for Nepal's economic growth in 2020 to a contraction of 2.3%, compared with our previous forecast of 3.2% growth.

The week ahead

The economic calendar is relatively sparse in Asia this week. We do not expect the Bank of Korea (South Korea's central bank) to alter its policy settings at its meeting on August 27th, as it remains too early to judge the impact of a recent spike in coronavirus cases on consumer and business confidence. Elsewhere, external goods trade data for July will be released by Hong Kong, Malaysia and New Zealand, following a similar release by Thailand on August 24th, which is likely to underscore the trend towards increasing trade surpluses. Industrial production data releases from Singapore, Taiwan and Vietnam will help to round out the regional manufacturing picture.