India: PMI tumbles again confirming suspicions of a slowdown ::JPMorgan

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India: PMI tumbles again confirming suspicions of a slowdown but producers still retain pricing power

India’s manufacturing PMI falls sharply for a second successive month consistent with other indications that the anticipated slowdown is underway New orders experience their largest plunge since the global financial crisis suggesting that the recent moderation in IP is likely to sustain and even get exacerbated Output prices, however, continue to rise suggesting that producers still retain pricing power despite a slowing economy The existence of pricing power was a key rationale underpinning the RBI’s more aggressive stance at its last review, and today’s print is further evidence that more monetary tightening may be warranted Exports continue to stay buoyant in June suggesting that softening global demand in 2Q has not materially impacted India’s external sector as yet Non-oil imports continue their recent strong run likely reflecting increased import-substitution but also suggesting that activity is still stronger than commonly thought The monthly trade deficit mean reverts suggesting that the widening experienced the previous month was an aberration July PMI tumbles again and future prospects look sobering   Consistent with indications that the economy is in the midst of a slow-down, the July PMI fell sharply for a second consecutive month. Specifically the PMI fell 1.7 pts to 53.6 in July after falling 2.2 pts in June. This is in line with other high-frequency indicators (motor vehicle sales, IP, non-food credit growth) that have shown a sustained moderation in recent months.   The output index fell 1.2 pts to 57.2, the third successive month that output has moderated. Yet, this was not the bad news. Instead, what was more sobering was that new orders plunged 5.5 pts to 54.5 – the largest fall since the height of the global financial crisis in November 2008 – though from a higher level. As a consequence, the new-orders/inventory ratio fell to its lowest level in more than two years. This has been a reliable leading indicator of industrial production and suggests that IP is likely to moderate further in the months to come.   The export conundrum continues   New export orders continued their decline, falling for a fifth consecutive month. Importantly, the index fell below the expansionary threshold of 50 to 49.2 – the first such instance in more than two years. New export orders has typically been a reliable leading indicator of actual export realizations a few months later. Over the last few months, however, exports have continued to surge (see discussion of June exports below) even though export orders have suggested otherwise.   However, with downside risks to global activity increasing we expect that this aberration is likely to correct and that the heady export growth that India has witnessed is likely to moderate in the months to come. It is important to point out, however, that with an increasing fraction of India’s exports being directed to other emerging markets (Latin America, China, Southeast Asia, Africa) the slowdown in export growth will be less accentuated that any growth disappointments in the DMs in the second half of this year would suggest.     Activity may be slowing but producers still retain pricing power!   It is important to note that, from the perspective of reversing stubbornly high inflationary pressures and expectations, not only does the economy have to slow, but needs to slow sufficiently to diminish the pricing power that producers still possess. The fact that producers still retain this pricing power was a key driver behind the RBI’s more aggressive stance in its July policy.   As it turns out, evidence from today’s PMI report suggests that this pricing power is alive and kicking. Output prices rose sharply by 1.6 pts to 56 in July, outstripping the increase in input prices (+ 0.3 pts) such that margin pressures abated. What this suggests is that, despite slowing, final demand is still strong enough for producers to pass on input price increases into output prices. Furthermore, output prices have been a reliable leading of core inflation in India, suggesting that core inflation in July could well accelerate further despite activity slowing. All this is further evidence that more monetary tightening may be warranted in the months to come.       Trade deficit mean reverts as June exports remain buoyant   As alluded to earlier, in contrast to the moderating trend observed in new export orders, actual export realizations have continued to remain very buoyant over the last few months. June was no exception. Exports grew a whopping 46.5 % oya and showed a sharp sequential increase (+ 8.3 % m/m, sa) even over the elevated levels of the previous month.   Non-oil imports, too, continued their recent buoyancy, growing 47.8 % oya in June. The recent pick-up in non-oil imports, undoubtedly, points to some degree of import-substitution given that inflation rates in India continue to remain elevated and outstrip its trading partners. However, it also serves to corroborate the notion that final demand in India is still stronger than is commonly thought.   Despite the strength of imports, the trade deficit narrowed to $7.7 billion – consistent with its lower trend over the last six months – and confirmed suspicions that the sharp widening of the trade deficit observed in the previous months ($ 14.9 billion) was an aberration.