India: another month, another drop in the PMI :: JPMorgan

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India: another month, another drop in the PMI

India’s manufacturing PMI declined for a fourth consecutive month driven by a moderation in both output and new orders The services PMI, which has remained relatively buoyant until now, also plunged in August to its lowest level in two years Both of these are consistent with our view that activity is poised to decelerate appreciably in the coming quarters notwithstanding last week’s solid Q2 GDP print However, inflationary pressures continue to remain in the system with manufacturing input prices rising for a third consecutive month putting further pressure on margins With inflation still uncomfortably high, the RBI is expected to continue raising rates at its September review despite slowing activity Manufacturing PMI continues to fall across the board… Last week’s expectedly solid Q2 GDP report was evidence that the economy had not slowed appreciably during that quarter. However, as we had warned then, leading indicators have suggested for a while that the economy is poised to slow further in the quarters to come. The latest set of PMI reports has served to reinforce this notion. Manufacturing PMI declined for a fourth consecutive month in August falling to 52.6 (from 53.6 in July) – thereby printing at its lowest level in 29 months. The decline was across the board with output, new orders and new export orders all continuing to decline. Output fell for a fourth consecutive month to 56 from 57.2 in July, reflecting the slowdown in new orders since April of this year. In turn, new orders declined for a fifth consecutive month to 53.1 from 54.5. Solace, if any, was found in the fact that the decline was relatively moderate compared to the sharp plunge in July, perhaps suggesting that demand is stabilizing but at a lower level. New export orders also continued to moderate sharply printing at 45 in August compared to 49.2 in July and 53.2 in June. This is not surprising given a slowing global economy and suggests that the sizzling export momentum witnessed in the first half of this year could moderate appreciably in the second half. In the wake of sharply slowing new orders, strong export realizations over the last few months likely reflect the fact that exporters have been covering the backlog emanating from strong export demand earlier in the year. …but inflationary pressures remain in the system In a sense, today’s PMI report served as a double whammy. Not only did activity continue to slow, but inflationary pressures continue to remain entrenched in the system. While the output price index moderated slightly, the input price index rose by its largest margin since February, putting further pressure on already compressed margins. This is the third consecutive month that input prices have increased and reflects the sharp increase in non-food primary article prices within the WPI basket in the first few weeks of August. As such, while output prices may have moderated in August, they may be forced to increase in the months to come, unless demand slows to the point that producer pricing power is significantly eroded. Service business activity plunges to its lowest level in 2 years While much attention is paid to the manufacturing PMI, it is important to recognize that manufacturing constitutes less than 20% of GDP. Instead, buoyant growth in services (trade, transport, communication, financial and business) has propelled economic growth over the last few quarters and propped up growth in last week’s Q2 GDP report. Consistent with this, business activity within the services PMI has remained relatively buoyant over the last few months even as its manufacturing counterpart has been on a secular decline. This phenomenon changed in August. Services business activity plunged to 53.8 (it’s lowest level in more than two years) from 58.2 in July. The plunge also constitutes the sharpest decline since January 2009 in the immediate aftermath of the global financial crisis. Furthermore, future prospects also look sobering with new business activity also plunging to 54.9 from 59.3 in July – the largest fall over the last year. What all this suggests is that, like industrial growth, growth in services is posed to decelerate in the months to come and could cease to be the lynchpin that has supported growth over the last year. Growth to slow but RBI not done as yet In sum, the forward looking components within the latest set of PMI surveys are consistent with our view that growth is likely to decelerate appreciably over the coming quarters as the full impact of the monetary and fiscal tightening takes hold. Furthermore, the surveys also suggest that inflationary pressures continue to remain entrenched in the system and, with August inflation expected to accelerate over already elevated July levels, we expect the RBI to continue its monetary tightening process at its quarterly review next week.