DBS sees double-digit contraction in economy in April-June quarter

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MUMBAI: The country’s economy is likely to show a double-digit contraction in the April-June quarter due to the restriction on economic activities on account of the COVID-19 pandemic, says a report.

In the January-March quarter of 2020, the gross domestic product (GDP) grew by 3.1 per cent.

“Our in-house GDP Nowcasting model, which analyses an array of high frequency (monthly) indicators to make a call on the ongoing and coming quarters on a real time basis, confirms the double-digit contraction in 2Q20 (second quarter of 2020), before ascending to a smaller extent in 3Q20 (third quarter of 2020),” Singapore’s banking group DBS said in a report.

The nature of this sudden stop owing to the pandemic will see real growth shift right to a lower trend, with part of the lost output unlikely to be made up for during the year, said Radhika Rao, economist at DBS Group Research.

The report said in the second half of 2020, the tug-of-war between reopening the economy and still-to be arrested infection curve is likely to continue.

“Assuming cases peak within 3Q20 (third quarter of 2020), we maintain our expectations for growth to return to black by end FY21, with full year average growth at -4.8 per cent year-on-year,” Rao said.

Delay in containing the pandemic and concomitant delay in full reopen of the economy poses 1-1.5 per cent worth downside to the forecast, she said.

The report said the authorities in the country face the delicate act of balancing recovery needs whilst fire-fighting the pandemic.

It said unlock 2.0 phase is in effect, under which more activities will resume. Operations of domestic flights and trains will be expanded, places of worship, hotels and malls will stay open outside of containment zones, occupancy limits will be eased.

Other restrictions remain in place, which includes closure of educational institutions, metro services stay shut, crowded activities like theaters, gyms, entertainment centres among others will stay closed and night curfews stay extended, the report said.

States and Union Territories can prohibit certain activities outside the containment zones based on their own assessment of the local situation, while containment zones stay in lockdown mode until July 31, barring access to essential services.

The impact of an extended lockdown is non-linear, to imply that longer the lockdown, exponential the economic drag, it said.

“Hence, even as the country tackles COVID-19 spread, gradual and guarded reopening is likely to continue, also necessitated by the dominance of an informal economy,” the report said.

The central bank and government have undertaken measures to limit the extent of deceleration during the lockdown, it said.

“We continue to expect further support in 2H (second half of) FY21 when the sectoral pain points, especially financial sector and those exposed to consumer discretionary spending, become apparent,” the report said.

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Tagged COVID-19 Outbreak, DBS, economy contraction, gdp, lockdown

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