Pandemic impact on global economic growth
The global economy was already undergoing turbulence in 2019 and now in the wake of COVID – 19 pandemic, the risk of global recession in 2020 is high as nations shut down economic activity to limit the spread of the infection.
Since the COVID-19 first diagnosis, it has spread like a wildfire to over 190 countries. Estimates so far indicate the virus could cut off global economic growth by as much as 2.0% pm if current conditions prevail. Global trade could also fall by 13% to 32%, depending on the severity of the global economic downturn. The overall effect is still unknown given the current situation and numbers of increasing at a drastic rate day by day.
The crisis has challenged governments to implement monetary and fiscal policies that support credit markets and sustain economic activity
GDP disruption
What will change forever?
Pandemic will significantly affect social behaviours, spending patterns, travel habits, supply chains, country – interdependence and service delivery models with consequential impacts on lifestyles, markets and the global economy.
India’s real GDP growth decelerated to its lowest in over six years in 3Q 2019-20 and steps involved in curbing this outbreak of pandemic have brought the economy to a standstill, with impact both in consumption and investment. The 3 major contributions to GDP – private consumption, investment and external trade have been affected.
Source: Mckinsey & Company
The following sectors are the ones which has been the most affected due to this pandemic outbreak –
- MSME
- Tourism and hospitality
- Real estate
- Aviation
- Automobile
- Retail
- Financial Services
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MSME Sector
A study by All India Manufacturers Organization (AIMO) estimates that about a quarter of over 75 million MSMEs in India will face closure in the lockdown due to COVID – 19 goes beyond 4 weeks and this figure is estimated to touch a whopping 43% if the situation extends beyond 4 weeks.
Impact will be shockingly high considering the fact the MSME provides employment to more than 114 million ppl and contribute around 30-35% of the GDP. Due to this lack of trade and shrinking sales, MSME’s are feeling the burden of loans, repayments, GST filings, etc”
MSMEs are affected at several levels – with the national lockdown the production facilities and the retail have been hit big time. Micro Enterprises specifically in the service sector are considerably impactful.
MSME engaged in the hotel industry, tourism, and logistics have been witnessing a sharp drop in business for some time. Consumer goods, Garments, footwear, utensils, automotive segments will see a major direct impact. Sectors which are dependent on high import (of raw material) such as electronics, consumer durables, pharma, are facing bottlenecks and so are the export-oriented sectors due to major drop in demand globally. Many of them are struggling with the continued losses in their business and inability to generate revenues, just trying to fight for their survival.
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Tourism and Hospitality Sector
MakeMyTrip co-founder and CEO Deep Karla told that the tourism sector was the first to get disrupted by the impact of Covid-19 and will be the last to see a resumption of activities. This sector faces questions around its very survival.
The travel sector is shrinking by up to 25 % in 2020 resulting in loss of 50 million jobs.
A KPMG report from last month had already predicted the Indian tourism and hospitality sector to have potential job loss of around 38 million which is around 70% of the total workforce.
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Real Estate Sector
One of the largest employment generators in the company and has a multiplier effect on 250 allied industries. The sector is expected to contribute to around 13% of the country’s GDP by 2025.
The year 2019 has been a mixed one for the Indian real estate industry, having attracted investments with $ 5 billion USD.
Residential Real estate sector has witnessed poor demand and lower absorption in the past few years owing to the economic slowdown, NBFC crisis, cynical buyer sentiment and developer default.
New constructions are stopped and sales have taken a hit. Experts say the extent of the impact is difficult to assess completely.
The sector may face the risk of delay in new launches, the slowdown in sales, etc. The recovery path for the real estate sector could be slow and painful. Leveraged companies could face more difficulties in a scenario when prices are expected to go down. However, listed players being large in terms of scale are expected to gain market share in the future.
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Aviation Sector
The crucial aviation sector that connects nations across the world is witnessing a rush of layoffs and pay cuts. Each day, there are reports of global airlines announcing furloughs or layoffs as operational strains deepen in the wake of the lockdown.
CAPA India, a leading travel and tourism consultancy firm, said last in a report last month that global aviation activity has sunk over 66% in the wake of the Covid-19 crisis.
With further extension of lockdown, the effects on the sector have amplified. It feared that the situation in the post-virus setup would remain pretty much the same for the aviation sector.Demand will be suppressed due to economic dislocation; slow or even negative GDP growth.
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Automobiles Sector
For a sector, which had been trying to overcome myriad challenges already, the outbreak of COVID-19 is no less than a curse. Continued cash flow tightening will impact the market further.In FY20, automobile volumes declined on account of weak economic scenario, price increase due to BS6 transition, inventory correction by OEM’s and Covid-19 impact in March 2020.
Aftermarket spending by consumers on discretionary items will be put off due to an increase in spending shares of essential items including food and medicines, for the immediate period. Only essential repair related aftermarket services may continue but under low demand.
Kotak Securities expects the near term to be challenging for the auto sector due to lack of near-term demand catalyst in view of economic impact from COVID-19.
Geojit Financial expects a partial revival in the car segment post lockdown which was postponed by consumers in anticipation of new emission standards from April 1, 2020, provided the salaried class or urban demand is less impacted.
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Retail Sector
Retail accounts for 10% of GDP and supports 8% of employment (2018-19). Major segments of retail are – Household and personal care (50%), healthcare segment (31%) and food and beverages (19%).
Organized retailers are heavily impacted by the shutdown of malls and shops while the influence on essential goods retailers is minimum. Nair of Geojit Financial Services believes this huge impact is likely to stay until the economy is opened phase-wise, having a maximum benefit to online retailers.
The ability to predict and manage operations will be a game changer for e-commerce companies. There will be increased pressure on supply chain for delivery of products
While the overall outlook is likely to improve steadily post-recession, as employment and personal income in the economy reverse. Significant improvement in business is expected in the second half of FY21 supported by government spending, liquidity from RBI, good monsoon and provided we have a successful lockdown and confidence of a remedy in the future.
Sectors that depend on people’s behaviour would take the longest time to recover after the end of the lockdown period, while those curbed by the government to contain the spread of coronavirus are set for a bounce-back immediately after the restrictions are removed, say experts.
Pharma, medical and health equipment and digital companies are among those which have seen a jump in their business following the COVID-19 pandemic
Former Telecom and IT Secretary, R Chandrashekhar says the companies connected with the digital world and providing services which enable digital – entertainment, work and office system, among others, and logistics supply chain would do well.
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Financial Services
With the COVID-19 pandemic leading to lower GDP growth for FY2021, the risk of a steep fall in loan growth is getting stronger and Banks profitability will be under pressure. There is a strong fear that the banks and NBFCs may see a rise in NPAs as COVID-19 has hit businesses strongly since several small and medium-scale industries are on the verge of collapsing resulting in potential risk of defaults and insolvencies
“Loan growth demand is likely to be led by negative outcomes such as worsening working capital cycles, moratoriums or restructuring or slower pre-payments,” said Oza of Kotak Securities.
Retail financing will be impacted for at least 2Q, as the demand for housing assets, consumer goods and working capital financing will get hit due to general slowdown in economic activity
Key priorities of NBFCs and HFCs in this time of hour should be on liquidity and risk management. Post the lockdown, growth recovery would be divergent across business segments. Motilal Oswal Financial Services said that funding cost is likely to remain high due to risk aversion from the banking system and tight capital markets.
As per Nair of Geojit Financial, Banks’ total credit is expected to grow lower to 6% compared to the previous 9 percent in FY21. The asset quality though weakened will be at manageable levels given the benefit of moratorium, liquidity and cut in interest rate.
Healthy banks with the strong capital base will be able to bear the higher interest cost and provisions, but net interest margins will be hit,” Nair said.
How can Analytical Investments be helpful in reviving the various sectors mentioned above?
Analytical Investments work with 65+ banks and NBFCs to provide the best service through reducing the ROI of existing loans or increasing the existing loan amount or both. From the above-mentioned sector, we can focus on MSME, Real Estate, Retail sector the most.
| Sectors | Parameter | Impact | Overall effect | How can Analytical Investments (AI) help? |
| MSME | Cash flow constraints | High | WC needs during lockdown, also supply chain is disrupted, for future investments and expansions. | Govt has announced ₹20-lakh crore economic relief package for MSMEs and also revised its definition to include more enterprises. AI will be helping clients in getting working capital requirement, increasing cash credit for smooth functioning of the business by collaborating with one or more banks. |
| Supply Chain Disruption | High | Relationship with downstream and upstream enterprises, pressure to look for newer markets etc | ||
| Consumer Sentiment | High | negative sentiment and diminishing liquidity will impact most of the consumer goods industries, retail and services enterprises. | ||
| Real Estate | Cash flow constraints | High | Weakening Sale velocity and restricted travel would impact cash flows in the hospitality and retail segment | For Real estate industry extension of ‘term loan’ moratorium by RBI till August 31 is an honest step to support several sectors. So, AI can approach those banks where loans of this type can be availed. |
| Supply Chain Disruption | Medium | Delayed Construction leading to disruption in supply chain | ||
| Consumer Sentiment | High | Lower footfalls for retail and hospitality segment. Limited new leasing activity due to industry shutdown and potential change in user habits | ||
| Retail Sector | Cash flow constraints | Essential goods – Medium; Non-Essential goods – High | Cash rotation would slow down for all categories. Food and Groceries would be less impacted. Large retail and real estate company can be expected to renegotiate rental contracts by invoking the force majeure clause | AI along with the help of banks/ NBFCs can try helping these company esp. food and groceries (brick and mortar as well as online businesses) to strengthen their liquidity ratio. Bill discounting is also a great option for this sector and advising Co’s to focus on selling essential goods only for next few months then slowly including the non-essential goods. |
| Supply Chain Disruption | Essential goods – Low; Non-Essential goods – High | A big challenge and needs realignment | ||
| Consumer Sentiment | Essential goods – Unknown; Non-Essential goods – High | Sentiment will be to conserve cash due to the uncertainty about the duration of COVID -19 |
Note:
Essential goods: – includes food, grocery, health/hygiene, ecommerce delivery companies
Non- essential goods: – includes durable, apparels, other discretionary products
References
- Congressional Research Service – Global Economic Effect of COVID – 19
https://fas.org/sgp/crs/row/R46270.pdf - Potential impact of COVID- 19 on the Indian Economy – Mckinsey & Company
https://home.kpmg/content/dam/kpmg/in/pdf/2020/04/potential-impact-of-covid-19-on-the-indian-economy.pdf - Getting ahead of coronavirus : Saving lives and livelihoods in India – Mckinsey & Company
https://www.mckinsey.com/featured-insights/india/getting-ahead-of-coronavirus-saving-lives-and-livelihoods-in-india - https://www.indiatoday.in/business/story/coronavirus-5-indian-sectors-that-need-urgent-help-as-virus-ravages-economy-1670099-2020-04-23
- https://economictimes.indiatimes.com/news/company/corporate-trends/post-lockdown-which-sectors-will-bounce-back-which-will-take-time-experts-weigh-in/articleshow/75081939.cms?from=mdr
- https://www.bloombergquint.com/economy-finance/lockdown-has-had-disastrous-impact-on-hospitality-sector-govt-support-needed-industry
- https://www.moneycontrol.com/news/business/markets/covid-19-impact-5-sectors-that-are-worst-hit-and-the-road-ahead-for-them-5192711.html