By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Lull, Not Calm
There is a distinct difference between a lull and a calm. On that note, overnight markets may claim a lull, but certainly not calm. On the whole, caution appears to be seeping in.
USD gained fractional traction, stalling EUR below mid-1.20, and AUD ahead of mid-0.77; with USD/SGD corresponding regaining ground from testing mid-1.3.
USD/JPY though defied a firmer USD to test sub-108; but this may be heeding softer UST yields and equities.
Meanwhile, India’s deadly second wave leaves the nation with a sore lack of a lull or calm.
India’s Deadly Second Wave Threatens a Disproportional Setback
India’s Covid second wave is extremely worrying, and threatens to disproportionately set back India’s recovery. First, the outbreak is back with a vengeance.
Catalysed by more transmissible strains, and a population caught with containment fatigue (and resultant complacency), new daily cases are surging alarmingly to unprecedented rates.
Daily cases surged past 250K, averaging >200K over the week. And India has overtaken Brazil as the worst-hit country, in terms of total cumulative cases, apart from the US.
Crucially, at the current pace of outbreak, India’s path is diametrically opposed to the US, where the curve is flattened, setting the stage for an even more negative divergence .
Second, vaccination pace as things stand will not be able to neuter this outbreak. And so, without robust complementary containment discipline, the strategy to ramp up vaccination is not absolved of prolonged period of healthcare and economic distress.
In particular, the realities and tragedy, of severe strains on hospitalization capacity in the interim (before vaccinations finally catch up with, to rein in, the outbreak), will inadvertently result in unnecessarily larger than expected human tragedy and economic scarring.
Moreover, shades of vaccine nationalism means that strains on India’s vaccine production capacity will lamentably impede progress in tackling Covid in a timely manner. And time is of the essence given path dependence of economic outcomes on the trajectory of Covid infections/hospitalisations. This not only affects India’s vaccination trajectory, but has a global impact insofar that India is a key global manufacturer of the Covid vaccine.
Finally, even if the near-term setback to growth is not likely to be as severe as last year’s brutal lockdown, lingering effects of scarring, and on confidence, is an unwelcome and possibly lasting blow to a fragile recovery; which in any case is overstated by base effects.
Upshot being, flattening the curve is as, if not more, critical now as it was during the last surge; and ramping up vaccines alone is neither feasible nor adequate.
And the failure to do so thus far warns that the impact on recovery is not merely a delay, but a very real threat of diminution given scarring and path dependence.
Accordingly, we are now revising down our earlier call for calendar year 2021 growth to 6.8-7.8% (from the 10% ballpark earlier). Clearly, confidence around growth forecasts are diminished. But this forecasting problem is dwarfed by a dire crisis of lives and livelihoods.
Indeed, the real tragedy is that a disproportionately adverse impact on lower income workers (once again displaced) recycling via the grey economy not only squanders past gains in alleviating poverty, but may setback growth ambitions for a longer period.
And in the near-term, over the next couple of quarters, there is a very real danger of India’s recovery shortfall and negative divergence presenting itself as credit ratings risk.
Source: Mizuho Bank Ltd