According to the research paper, titled Asia Economics: Goldilocks and the Three Bears, while India lags in Covid-19 containment, high frequency macro indicators have continued to show a clear recovery into October.
Morgan Stanley believes that India, Indonesia and the Philippines look better placed in this Goldilocks environment, as they stand to benefit more from early vaccine availability and the Fed’s AIT (average inflation targeting) framework.
Goldilocks economy is often the one where the growth is high but the inflation is under control. That is the economy is in equilibrium or the best state possible: with good employment figures, economic stability and higher than world average growth.
“Whilst India lags in Covid-19 containment, high frequency macro indicators have continued to show a clear recovery into October,” Morgan Stanley research said. “India’s Serum Institute has tied up with AstraZeneca, and Phase III trials are under way – vaccines could start to become available by early 2021,” it added.
The search report by Morgan Stanley economists, Deyi Tan, Zac Su, Jin Choi & Jonathan Cheung, debated the three “bearish” hypotheses many economists seem to be basing their forecasts on.
The first bear, as the research report puts it is the assumption that economies would struggle to return to normalcy unless a vaccine becomes broadly available. Many fear that absence of a vaccine would mean Covid-19 may keep surfacing again and again.
“A few factors suggest a less pessimistic tone. AXJ (Asia except Japan) has generally seen more effective institutional response in terms of efforts to contain the pandemic. Economies which have lagged in containment could benefit from vaccine availability as soon as late 2020/early 2021,” the research report said.
The economists also argue against the second hypothesis that the lack of policy space, social safety net and savings would constrain the recovery and that the unorthodox measures like debt monetisation add risks.
“AxJ has more policy space than many investors believe. Most economies have manageable public debt ratios and excess savings to fund fiscal deficits.”
The third bear—“Covid-19 would lead to longer-term scarring, with implications for potential growth. Some economies were already not performing well before Covid-19, and the pandemic could weaken them further” may also not be accurate, the research points out.
“Morgan Stanley agrees that Covid-19 exacerbates medium-term headwinds from rising indebtedness, de-globalisation and less complementary China growth. However, Morgan Stanley would differentiate between the short-term cyclical view and the medium-term structural view,” the research points out.