Prospects of global economy slowdown to keep policy uncertainty elevated

Economists caution that continuing weakness in the world economy would keep global economic policy uncertainty elevated, hurting the investment climate. As IMF pointed out, a common influence on sentiment across advanced and emerging markets and developing economies has been high policy uncertainty. Clearly, the Global Economic Policy Uncertainty Index mirrors these concerns regarding difficulties in resolving contentious issues (see chart).

The Baker-Bloom-Davis index of Global Economic Policy Uncertainty is a gross domestic product (GDP)-weighted average of national economic policy uncertainty indices of 20 countries including China, Germany, India, Japan, the UK and the US.

IMF expects the world economy to grow 3.3% this year. That’s 20 basis points down from its previous outlook of 3.5%, which was also a downgrade.

One basis point is one-hundredth of a percentage point.

India is not spared. The spate of downgrades continues in the country as well. Following the footsteps of the Asian Development Bank and the Reserve Bank of India, IMF cut its India GDP growth forecast for 2020 to 7.3%, from 7.5% earlier.

Of course, the weakness in the Indian economy would impact corporate profitability, but Indian equities seem to be ignoring the signs.

“The Indian market has largely ignored the recent economic growth deceleration, rebound in crude prices and deterioration in India’s fiscal position," Kotak Institutional Equities said in a report on 9 April.

Analysts say the renewed interest of foreign investors is keeping the mood upbeat despite macro-concerns. “While one cannot guesstimate how long these flows will continue, as long as the interest rate scenario is soft abroad, money will keep coming into emerging market equities, including India," said Deepak Jasani, head of retail research at HDFC Securities Ltd.

High-frequency data, such as automobile sales, presents a dismal picture of India’s demand scenario. For instance, an Economic Activity Index compiled by brokerage house Jefferies India Pvt. Ltd slipped below 3% in February, the lowest in two years. The index consists of a number of indicators, such as passenger and commercial vehicle sales, electricity demand, cement production, exports, railway freight and credit growth.

That said, demand increase and private capex would need to improve, and so would the elusive investment push. If not, achieving the lower 7.3% growth forecast, too, could be a tough ask. The nail biting continues.