In less than a month’s time, rating agency Moody’s Investors Service has revised its growth projections for India to 5.3 per cent for 2020 from 5.4 per cent, as it expects the coronavirus outbreak to dampen domestic demand globally.

Earlier in February, the rating agency had reduced its growth projections for Asia’s largest economy to 5.4 per cent from 6.6 per cent.

In its update on Global Macro Outlook for March, Moody’s said the virus outbreak has spread rapidly outside China to a number of major economies. “It now seems certain that even if the virus is steadily contained, the outbreak will dampen global economic activity well into Q2 of this year,” it said.

Moody’s baseline forecasts assume that the number of cases would keep increasing globally and there would be travel restrictions through the April-June period.

Apart from supply chain disruptions, it also expects consumption and investment to be affected and prices of oil and other commodities to remain around current lows until the end of June.

Accordingly, Moody’s has revised growth forecasts for G20 economies to 2.1 per cent, 0.3 percentage point lower than the previous baseline.

“We expect these shocks to materially slow economic activity, particularly in the first half of this year. We have therefore revised our 2020 baseline growth forecasts for all G-20 economies. We expect these countries, as a group, to grow by 2.1% in 2020, 0.3 percentage point lower than our previous forecast,” it added.

Moody’s also reduced China’s 2020 growth forecast to 4.8 per cent from the previous estimate of 5.2 per cent. For the US, growth of 1.5 per cent is now expected, down from the previous estimate of 1.7 per cent.

For India, Moody’s has projected growth at 5.3 per cent for 2020, lower than 5.4 per cent GDP expansion projected in February, taking into account the baseline scenario of significant global disruption.

Moody’s said baseline forecasts for this year are based on two assumptions, the disruption of economic activity in the first half of this year will be followed by some recovery in global factory production and consumer demand in the second half, and warmer weather in the Northern Hemisphere in the spring and summer will weaken the spread of the virus.

“Our baseline forecasts assume that the global efforts to arrest the spread of the virus and, perhaps, warmer weather in the Northern Hemisphere in the spring and summer, will allow economic activity to pick up in the second half of the year. Accordingly, these forecasts incorporate a pullback in consumption in the first half of the year followed by a moderate recovery in the second half. Our forecasts also assume ongoing disruption to production and supply chains through the first half. However, the evolution of the virus remains highly uncertain and the full extent of the economic costs will be unclear for some time. Fear of contagion will significantly affect consumer behaviour. The economic impact will magnify the longer it takes for households and businesses to resume normal activity,” it cautioned.

“Since the publication of our last Global Macro Outlook update in mid-February, the coronavirus outbreak has spread rapidly outside China to a number of major economies including Korea, Iran, Italy, Japan, Germany, France and the US,” said Mood’s adding that previously, “we assessed the effects of the virus mainly on aggregate demand in China, global travel and global factory output resulting from disruptions in supply chains through East Asia.”

It is now clear that the shock will additionally dampen domestic demand globally, which will affect a wide range of non-traded activities across countries and regions simultaneously, it said.

Further, Moody’s has also analysed the downside scenario of ‘extensive and prolonged slump’ in case of a significant increase in coronavirus cases or increasing public fear that the virus will not be contained and oil price stays around $40-50 for 2020.

In such a downside scenario, Moody’s expects India’s growth to fall to 5 per cent in 2020, China (3.7 per cent) and the US (0.9 per cent).

Stating that global recession risks have risen, it said that the longer the outbreak affects economic activity, the demand shock will dominate and lead to recessionary dynamics.

“In particular, a sustained pullback in consumption, coupled with extended closures of businesses, would hurt earnings, drive layoffs and weigh on sentiment. Such conditions could ultimately feed self-sustaining recessionary dynamics. Heightened asset price volatility would magnify the shock,” Moody’s added.

(With input from agencies)