Brokerage firm Nirmal Bang Equities believes the year 2023 will see a short and shallow recession and there will be a recovery in the latter part of the year after a period of pain.
Revealing its outlook for the year 2023, the brokerage firm said it will be the year of RRR- reset, recession and recovery.
"We see CY23 (the calendar year 2023) as a year of three parts; the first part will continue to see a ‘reset’ between the normal of the pre-pandemic era and the new normal of the post-pandemic era. The ‘reset’ in our view, like most transformations, will carry its share of pain in the form of a ‘recession’. However, the ‘recession’ may be shallow and short-lived, paving the way for a ‘recovery’ going into CY24," the brokerage firm said in its 2023 outlook report which it has named.
The brokerage firm pointed out that the last 12-15 months have witnessed a 'reset and rebalance’ between the normal of the pre-pandemic era and the new normal of the post-pandemic era.
The brokerage firm highlighted the following resets currently underway:
(1) Pre-pandemic low inflation era versus the post-pandemic high inflation era
(2) Easy liquidity and low-interest rates of the pandemic era versus tighter financial conditions
(3) Pre-pandemic off-shoring versus post-pandemic nearshoring/friend shoring
(4) Balance between increases in corporate profitability and wage growth
(5) Balance between renewable energy and fossil fuels
Nirmal Bang believes these ’resets’ will continue well into the early part of CY23.
The brokerage firm now sees an increasing possibility of rate hikes in early CY23 as well on the back of continued strength in macro indicators.
"These 'resets’, particularly the tightening of financial conditions, will most likely bring in its wake a ‘recession’ by the middle of CY23," said Nirmal Bang.
Nirmal Bang said a brief study on the history of US recessions suggests that recessions caused by the US Fed are not uncommon. A saving grace is that recessions caused by Fed tightening are usually shallow and short-lived.
"Recessions caused by Fed policy actions have lasted nearly one-three quarters with the average decline in GDP well under one percent. Nevertheless, while the US economy may be relatively more resilient, other developed markets (DMs), particularly Europe, face the prospects of a shaper recession. On the flip side, the opening up of China may provide some tailwinds for global growth," said Nirmal Bang.
Nirmal Bang believes that recessionary conditions in the US will be met with policy easing by the Fed by the end of CY23, paving the way for a ‘recovery’.
However, the brokerage firm added that with a shallow recession, policy easing might be nothing like the quantitative easing (QE) implemented during the Covid-19 crisis or the 2008-09 Global Financial Crisis (GFC).
"Policy easing in our view will largely be restricted to rate cuts by end of CY23 and beyond. Rate cuts in the US may be accompanied by easing from emerging market (EM) central banks, including the RBI assuming benign inflation," said Nirmal Bang.
Slowing global growth to weigh on India
While the Indian economy appears to be on a strong footing, slowing global growth will weigh on India.
Nirmal Bang pointed out that the IMF expects global growth to slow from 6 percent in CY21 to 3.2 percent in CY22 and 2.7 percent in CY23. This is the weakest growth profile since CY01, except for the GFC (global financial crisis) and the acute phase of the Covid-19 pandemic.
"As has been the case historically, India’s growth tends to move in sync with global growth cycles and, therefore, slowing global growth is likely to weigh on India," said Nirmal Bang.
Nirmal Bang expects GDP growth of nearly 6 percent in FY24, down from 7.5 percent in FY23.
The brokerage firm believes stable domestic fundamentals in terms of the strong financial sector and non-financial sector balance sheets, and some amount of counter-cyclical fiscal policy ahead of Lok Sabha elections in FY24 will limit any growth slowdown.
"We expect agricultural sector growth to be relatively robust at 4 percent in FY24, supported by recent Rabi sowing trends. The large part of the slowdown we are factoring in will come from the services sector (including construction). The industry sector may see some recovery in FY24 on a low base as margin pressure on account of elevated raw material (RM) prices have acted as a drag on manufacturing growth in FY23," said Nirmal Bang.
The brokerage firm expects CPI inflation to average nearly 4.5 percent in FY24, moderating from an estimated 6.4 percent in FY23.
"While we expect CPI inflation to moderate, supported by some easing of commodity prices, core CPI inflation will remain about 4.8-5 percent on account of sticky services inflation and relatively sticky selling prices on goods vis-à-vis easing input prices," said Nirmal Bang.
Excessive tightening by global central banks beyond Q1CY23, an uptick in commodity prices due to geopolitical tensions and the persistence of high inflation are the three key risks for the market, said the brokerage firm.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.