February IP slows with still no signs of an investment pick-up :: JP Morgan

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India: February IP slows with still no signs of an investment pick-up

Feb IP growth moderates to 3.6% oya even as Jan IP is revised up to 3.9% oya Moderation in Feb IP is likely a payback to sharp sequential growth over the last two months More generally, tepid year-on-year IP growth rates in recent months have masked a reacceleration on a sequential basis on account of surging exports However, with downside risks to the global outlook rising in recent weeks, legitimate questions can be raised about how long exports will lift IP growth There are still no signs of any pick-up in the domestic investment cycle with capital goods production slumping yet again With the FY12 budget proposing a sharp fiscal retrenchment, a pick-up in the capex cycle in the next fiscal is critical to ensuring that growth sustains close to 8% in FY12 February IP moderates even as January IP is revised up February IP growth moderated to 3.6 % oya (-0.9 % m/m, sa) even as January IP growth was revised up to 3.9 % oya (1.8 % m/m, sa) from the initial estimate of 3.7 %. While the February IP print was below market expectations (Consensus 5.1 %), the moderation wasn’t entirely unexpected, because it constitutes a likely payback to sharp sequential increases in IP growth (2.8 % and 1.8 % m/m, sa respectively) over the last two months. More generally, the tepid year-on-year growth rates over the last few months are, in large measure, on account of the high base from the previous year, and are masking a re-acceleration of IP growth in sequential terms over the last quarter, consistent with regional trends (see, “Asia focus: clouded IP outlook after strong start in 2011,” by Matt Hildebrandt, MorganMarkets, April 8 2011). Specifically, IP growth has accelerated from 2.1 % (q/q, saar) in December to 9.6 % (q/q, saar) in February, a dynamic still not captured by the year-on-year growth rates which still hover in the 3% range on a three-month moving average basis. IP growth being driven by surging exports… While the headline growth in IP may be encouraging on a sequential basis, what’s worrying is what the drivers of this growth have been in recent months. As we have long-maintained, there is an increasingly strong correlation between IP and export growth with a majority of manufacturing output now being exported. As such, the re-acceleration of IP growth in recent months does not come as much of a surprise as it has likely been driven by surging exports since December (39.4 % oya, 3mma), in response to a reacceleration of global growth and activity towards the end of 2010. However global risks have increased significantly in recent weeks as crude prices continue to stay elevated and there are fears of accelerated fiscal tightening in some developed markets. As such, if global activity and growth were to soften in the coming quarters, the impact on India’s exports – and thereby on IP growth – would be material, since external trade seems to be the primary driver of the recent IP momentum. ….. with still no sign of a pick-up in the domestic investment cycle While exports have provided a key-support to IP growth, the private investment cycle (outside of infrastructure) has been a consistent disappointment over the last year. February was no different, with the capital goods index within the IP (a leading indicator of investment activity) again slumping sharply (-18.4 % oya, -8.8 % m/m, sa) suggesting that another month had gone by with no upswing in the private capex cycle. February was the third successive month that witnessed a sharp deceleration of capital goods production compared to a year ago. As we have long argued, the only material investment that has taken place over the last few quarters has been in the infrastructure sector, which had propped up the capital goods index in the first half of 2010. With infrastructure investment seemingly slowing in recent months on account of governance and environmental issues, capital goods production seems to have lost its key support With authorities planning a sharp fiscal consolidation in FY12 (see, “FY12 budget surprises but beware of the fine print,” MorganMarkets, February 28, 2012), it is important that the private investment cycle turn-on at some point in FY 12 to help sustain growth close to the 8% mark. Furthermore, the increased capacity that will come online on account of an investment pick-up will be a critical prerequisite to ensuring that core – and, with it, headline – inflation stays contained over the next several quarters. Consumer durables continue their golden run In sharp contrast to the recent trajectory of capital goods production, consumer durables continued their golden run growing 23.4 % oya (3.1 % m/m, sa) in February. Consumer durables growth has now printed in double digits for all but one month over the last two years. Furthermore, there appears to be no loss of momentum in recent months suggesting that the rise in real interest rates over the last year has not had a material impact on this sector thus far In contrast, the other sub-indices within the IP (consumer non-durables, basic and intermediate goods) moderated slightly on a sequential basis, as likely payback to relatively sharp sequential growth over the last two months.