India: manufacturing PMI falls to a 2 year low accentuating fears of an industrial slowdown:: JPMorgan

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India: manufacturing PMI falls to a 2 year low accentuating fears of an industrial slowdown

Manufacturing PMI falls for a fifth successive month to its lowest level in 30 months, and is now barely in expansionary territory Output falls sharply reflecting the secular decline in new orders since March Surprisingly, however, new export orders tick back up, though it’s too early to assess if they have bottomed out While this is more evidence that industrial growth is expectedly moderating appreciably, services growth continues to remain relatively buoyant inducing us to retain our current GDP forecasts for FY12 While input prices moderate in September, output prices continue to remain sticky setting the stage for another sobering monthly inflation print The 2Q11 current account deficit widens sharply led by strong import growth and a widening of the trade deficit However, FDI flows bounce back sharply to ensure the BoP ends up in a healthy surplus   September manufacturing PMI barely in expansionary territory   Confirming fears that the industrial slowdown is likely to get more pronounced, India’s manufacturing PMI fell to 50.4 in September – barely in expansionary territory – from 52.6 in August. This is the lowest PMI reading since March 2009 – in the aftermath of the global financial crisis.   The drop in the PMI was led by a plunge in output, which fell almost 5 pts to 51.1 in September from 56 in August. That output would fall was not surprising, even if the magnitude did surprise on the upside. New orders have been on a secular decline since March, and the new orders/inventory ratio has followed suit. As such, it was inevitable that output would eventually follow       Today’s survey data is further confirmation that industrial growth (which printed at only 5.1 % in 1QFY12) is likely to slow further. In contrast, however, services growth is expected to remain relatively buoyant (consistent with strong service tax collections, for example) and agricultural growth is also likely to surprise on the upside. With services making up the bulk of economic activity (~ 60 % of GDP) we retain out FY12 growth forecasts of about 7.5% oya for now.     New orders fall but export orders surprisingly tick-up   If there was a ray of light in today’s survey data, it was on new orders. While new orders, at an aggregate level, continued to moderate (to 51.3 in September from 53.1 in August), new export orders surprisingly ticked up to 46.4 in September from 45 in August. It is, however, hazardous to read too much into this for now. The September increase could just be payback to the sustained moderation of new export orders over the last 4 months and the level still remains below the 50 threshold.     If, however, this is not an aberration and export orders continue to tick-up next month, it would add credence to the view that India’s increased geographical diversity of exports – with only a third of merchandise exports directed to the US and Euro Are – has relatively insulated its external sector, compared to some other Asian economies, from the slowdown in DMs     Mixed news on the price front   On the price front the news was mixed. There was some relief on the input price front (which fell to 62.1 in September from 65.6 in August) reflecting the fact that the sharp depreciation of the currency was more than offset by a moderation of global commodity prices in September. While this bodes well for future output prices, there was no joy in September. The output price index continued to remain sticky (55.5 in September vis-à-vis 55.6 in August) and, given that it is a good leading indicator of core manufacturing inflation, suggests that September core inflation is unlikely to moderate to any appreciable degree     2Q11 current account deficit rise sharply….   Contrary to market expectations, the 2Q current account deficit rose sharply to $14.2 billion from $5.4 billion the quarter before. The increase was driven both by a widening of the merchandise trade deficit as well as disappointing service export growth, reflecting slowing of activity in the US and Euro Area.   While merchandise exports continued their buoyant growth in the quarter (printing at $80.6 billion compared to $77.2 billion the quarter before), the trade deficit widened on strong import growth. As we have long been highlighting, the strength of imports reflects both that (i) the economy did not slow materially in 2Q, and (ii) that the inflation differential between India and her trading partners induced more imports at the margin.   Services, and software services in particular, disappointed which is understandable given that the bulk of these exports are concentrated to the US and Euro Area, and growth in the Euro area fell off sharply in 2Q.   With export growth likely to moderate in 3Q, it is possible that the current account deficit might widen further before it begins to narrow in response to a slowing domestic economic. As such, despite the CAD surprising on the upside, its run-rate is not inconsistent with that assumed in our BoP forecasts.     …but capital flows rise to the occasion   Despite the elevated CAD, capital flows rose to the occasion such that the BoP ended with the largest surplus in 7 quarters.   The most striking difference between 1Q11 and 2Q11 was in FDI flows. Recall, net FDI flows ground to a complete halt in 1Q ($ 0.6 billion), but rebounded sharply to $7.2 billion in 2Q – a level higher than that received all of last fiscal! This likely reflects the fact that governance bottlenecks that were holding back FDI flows into some of the large projects likely got clearances in 1Q. With the Reliance-BP deal accounting for another $6 billion in FDI flows (not reflected in the 1Q data), the risk to our FDI estimate for FY12 ($17 billion) is to the upside.   Portfolio flows were predictable muted and, equity flows in particular, are likely to remain that way until global risk aversion abates. Debt flows have been more stable and could get a boost in the coming quarters as authorities have relaxed the constraints on FII investment into corporate bonds.   Incoming ECB’s continued to stay buoyant in Q2 (almost $6 billion) as the onshore-offshore interest rate differential continued to widen. However, with a number of ECB’s coming up for redemption this fiscal and next, the net number was more modest. However, total loans (ECBs and short term trade credits) are still tracking in line with our BoP forecasts for this fiscal.