Recovery to firm up from Q2; India's GDP to strengthen to 9.8% in 2021: Morgan Stanley

A Morgan Stanley research note, written by Morgan Stanley economists led by Chetan Ahya, expects India's growth recovery to gain strength from the second quarter of FY21, and believes the GDP growth to strengthen to 9.8 per cent in 2021. They also said the Indian economy will recover to the pre-pandemic level of output in 4Q20. "We expect the growth recovery to strengthen in 2021, with GDP growth improving to 9.8%Y from an estimated contraction of 5.7%Y in 2020," the note said.

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The note adds that inflation will remain marginally above the targeted mark. "Inflation will remain marginally above the 4%Y target (in India) but external stability risks stay contained and policy rates only see the first lift-off at year-end from an extraordinarily accommodative stance," they said.

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On the global scale, after a V-shaped recovery to pre-COVID-19 levels, the economy has now risen to its pre-COVID-19 path by 2Q21. Both developed markets and emerging markets will drive this next phase of the global reflation, the report said. The economists said even as growth reaccelerates towards the trend rapidly, policies remain extremely accommodative, which is also laying the groundwork for a rise in inflation.

The investment banking giant said a broad-based recovery, both geographically and sectorally, will take hold from March-April onwards in 2021. The report 'The Next Phase of the V,' says the macro stability is now in check as a prolonged period in which emerging markets faced a series of cyclical challenges.

The bank has forecast global growth of 6.4 per cent in 2021. "Despite the sharp gyrations in economic output over six quarters, the global economy returns to the path it would have followed absent the COVID-19 shock," the Morgan Stanley note said.

The US investment bank highlighted three stands out features for world growth in 2021:

• Driving this synchronous recovery will be a more expansive reopening of economies worldwide and the extraordinary monetary and fiscal support now in place. Global GDP, already at pre-COVID-19 levels, continues to accelerate and is on track to resume its pre-COVID-19 trajectory by 2Q21.
• After a prolonged period in which EMs have faced a series of cyclical challenges, macro stability is now in check. With the COVID-19 situation improving in a broad range of EMs, their pace of recovery is catching up.
• The Morgan Stanley research note says they see a very different inflation dynamic taking hold, especially in the US. The COVID-19 shock has accelerated the pace of restructuring, creating a significant divergence between the output and unemployment paths.

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