New Delhi, Aug 26 | The slowing pace of economic recovery suggests that the recovery in some sectors may plateau much before pre-pandemic levels are reached.
“We also find that the sequential pace of normalisation is moderating, suggesting that some sectors may plateau much before they reach their pre-pandemic levels,” foreign brokerage Nomura said in a report.
As per the Nomura India Normalization Index (NINI), normalisation indices across sectors continued to inch higher in July, suggesting the post-lockdown recovery progressed in early Q3. However, the recovery remains uneven with a faster rise in supply (vs demand),
rural consumption (vs urban) and industrial sector (vs services).
“Overall, we estimate aggregate demand stood at 67 per cent of its pre-pandemic level in July, lower than aggregate supply (at 82 per cent).
“Our weekly tracker of the pace of activity normalization flat-lined at 73.4 for the week ending 23 August, still above July’s levels, but underlining the slower pickup once post-lockdown euphoria eases,” it said.
The report noted that sequential pace of recovery is tapering off. Although economic indicators are showing signs of recovery, the pace has moderated over the past few months.
The sequential pace of month on month normalisation in consumption in July was lower than the pickup in June.
Similar trends are seen in investment and industrial indicators, with the external sector being the only exception – the latter registered a faster pace in July due to the delayed recovery in import growth.
“Although a slower sequential pace is not entirely surprising as the fastest pickup is bound to occur right after lockdown relaxations, the slowing pace suggests the recovery in some sectors may plateau much before pre-pandemic levels are reached,” the report said.
Additionally, with aggregate supply getting close to its pre-pandemic normal, its next phase of recovery will need to be driven by higher demand, instead of normalization and pent-up demand thus far, it said.
“Consistent with evidence in other economies such as China, we find that aggregate supply is recovering faster than aggregate demand,” Nomura said.
Demand has likely taken a larger hit from higher precautionary savings by consumers amid rising income uncertainty; the classic ‘paradox of thrift’.
By contrast, the supply side has been largely constrained by lockdown rules and the availability of factors of production (such as labour, electricity and logistical support), which are more responsive to the ending of restrictions.
In July, the aggregate demand NINI picked up to 67.2 per cent of potential from 56.1 per cent in June, while the more buoyant supply side recovered to 82 per cent of the potential in July vs 79 per cent in June.
In a report, Morgan Stanley said that economic indicators for July and August have continued to improve, indicating a gradual normalisation in activity.
“With continued easing of restrictions, we expect economic activity to gradually normalise,” the report said.