2nd COVID wave to worsen contraction of economy: ADB

• Latest outlook assessment forecasts entire South Asia economy to contract by 6.1% in 2020 as opposed to previous estimate of 6.8% negative growth
• Entire developing Asia is forecast to contract by 0.4% in 2020 before picking up to 6.8% in 2021
• Forecast for Southeast Asia in 2020 revised down to -4.4% from -3.8% in Sept. assessment
• Sub region’s outlook for 2021 also downgraded; Southeast Asia now expected to grow 5.2% next year compared to 5.5% growth forecast in Sept.

Sri Lanka’s second wave of COVID-19 pandemic is expected to worsen the contraction of the economy in 2020, the latest outlook on Asia by the multilateral lender ADB has warned. 

It said that in Sri Lanka, economic recovery was underway in Q3, but a rapidly-expanding outbreak from early October brought localised lockdowns and restrictions, their economic effects compounded by resurgent outbreaks in Sri Lanka’s main export and tourist markets. 

“These factors are expected to worsen contraction in 2020,” the Asian Development Bank’s December supplement to its Asian Development Outlook (ADO) said. 

The worsening of the economy in Sri Lanka comes however when ADO has revised growth forecast of South Asia to a contraction of 6.1% in 2020 as opposed to a 6.8% negative growth earlier. This is based on improved prospects for India.

The ADO December supplement said the regional growth projection for 2021 has been revised up slightly from 7.1% to 7.2%. 

“Having contracted by 23.9% in Q1 of fiscal year 2020 (FY2020, ending 31 March 2021), the Indian economy began to normalise after containment measures started in ease in June, with economic contraction in Q2 FY2020 narrowing to 7.5%, better than expected,” it said. 

Agriculture, manufacturing, and utilities grew year on year, while a decline in fixed investment improved from 47.1% in Q1 to 7.3%. Net exports contributed 3.4 percentage points to growth in Q2. With the pandemic possibly having peaked in mid-September, many high-frequency indicators are better than a year ago or back to pre-COVID levels, indicating accelerating economic normalization. 

The GDP forecast for FY2020 is upgraded from 9.0% contraction to 8.0%, with GDP in H2 probably restored to its size a year earlier. The growth projection for FY2021 is kept at 8.0%.

ADO December supplement said in the rest of South Asia, economic activity started to normalise from Q3 2020, largely in line with Update projections. In Afghanistan, agriculture is robust, but the outlook is adversely affected by a new COVID-19 wave and intensified conflict even as peace talks continue. 

Economic activity in Bangladesh has recovered more strongly than expected with both exports and remittances growing in recent months but threatened by external risks as COVID-19 outbreaks renew in major export destinations. 

In Bhutan, the impact of COVID-19 is now expected to be greater than projected in the Update after a nationwide lockdown in August and September halted all economic activity. 

It said the Maldives restored more international flights in October, but travel demand remains weak as restrictions are reinstated in major European markets, hampering tourism recovery.

Nepal has substantially eased restrictions since September, but a persistent rise in COVID-19 infections is holding back demand, in line with Update projections. 

Pakistan’s economy is recovering, particularly in manufacturing and construction, supported by government emergency relief, ADO December supplement added.

Focusing on the entire region, it said economic activity in developing Asia is forecast to contract by 0.4% this year, before picking up to 6.8% in 2021 as the region moves toward recovery from the effects of the COVID-19 pandemic.

The new growth forecast, presented in a regular supplement to the Asian Development Outlook (ADO) 2020 Update, is an improvement from the -0.7% gross domestic product (GDP) growth forecast in September, while the outlook for 2021 remains unchanged. But prospects are diverging within the region, with East Asia set to grow this year while other sub regions are contracting.

“The outlook for developing Asia is showing improvement. Growth projections have been upgraded for the People’s Republic of China (PRC) and India, the region’s two largest economies,” said ADB Chief Economist Yasuyuki Sawada. 

“A prolonged pandemic remains the primary risk, but recent developments on the vaccine front are tempering this. Safe, effective, and timely vaccine delivery in developing economies will be critical to support the reopening of economies and the recovery of growth in the region.”

Pandemic-induced lockdowns and restrictions have been eased in varying levels in the region, with merchandise exports rebounding quickly from substantial declines in the second quarter. Mobility is also returning to pre-COVID-19 levels in East Asia and the Pacific, where the spread of COVID-19 has largely been contained or prevented in recent months. A recovery in tourism, however, is likely to be delayed.

Most of developing Asia’s sub regions are forecast to contract this year. East Asia is the exception, with an upgraded growth forecast of 1.6% for 2020 on the back of faster than expected recoveries in the PRC and Taipei, China. East Asia’s growth outlook for 2021 is maintained at 7.0%.

Economic growth in Southeast Asia remains under pressure as COVID-19 outbreaks and containment measures continue, particularly in Indonesia, Malaysia, and the Philippines. The sub region’s growth forecast for 2020 is revised down to -4.4% from -3.8% in September. The sub region’s outlook for 2021 is also downgraded, with Southeast Asia now expected to grow 5.2% next year compared to the 5.5% growth forecast in September.

The outlook for the Pacific is unchanged for both 2020 and 2021 at -6.1% and 1.3%, respectively. Central Asia’s growth forecast for 2020 remains at -2.1%, but outlook for 2021 is slightly downgraded to 3.8% from the 3.9% growth projection in September.

Regional inflation is expected to marginally ease to 2.8% in 2020, from the 2.9% projected in September, due to depressed demand and low oil prices. Inflation for 2021 is forecast at 1.9%, down from 2.3% forecast in September. Oil prices are retained at $42.50 per barrel in 2020 before increasing to $50.00 per barrel in 2021.

ADO, ADB’s annual flagship economic publication, is published every April, with an Update published in September and brief supplements published normally in July and December. Developing Asia refers to the 46 developing members of ADB.

ADB is committed to achieving a prosperous, inclusive, resilient, and sustainable Asia and the Pacific, while sustaining its efforts to eradicate extreme poverty. Established in 1966, it is owned by 68 members—49 from the region.