Macroeconomic Overview – Global
Economic data remains volatile, with wide divergences between regions but the global medium term outlook is constructive, in our view.
In fact, with the exception of Spain, economic activity in most major countries – including the US, China and the Eurozone – is expected to trough before the end of 2012.
The pickup in growth may be slow in Q1 2013, as uncertainties about the US fiscal cliff may persist. But the momentum in the US economy and in some emerging markets should ensure that activity accelerates in H2 2013 and that another recession is avoided.
We think the downside risks to the economy are reduced, and this should allow investment spending to pick up gradually.
Emerging markets should become the engine of global growth once again, with China bottoming out and other EM countries benefiting from strong domestic demand.
The US may slow somewhat, but less negative growth in Europe helps lift global GDP growth data when compared to 2012.
Inflation pressures have eased of late as a result of range-bound commodity prices, which is providing a welcome boost to consumers’ disposable income.
Risks
In our view, the global economy remains vulnerable to a significant worsening of conditions in the Eurozone, a spike in oil prices or a
continued stand-off between US political parties on the issue of the fiscal cliff. However, none of these are our base case scenario.
Macroeconomic Overview – India
Scraping the bottom of the bathtub: Q3 GDP slows a bit
Source: HSBC Global Research/Bloomberg
Facts:
India's Q3 2012 GDP growth eased to 5.3% y-o-y (vs. 5.5% in Q2 2012), in line with consensus. The sequential growth momentum also eased (1% q-o-q sa vs. 1.3% in Q2 2012), although this number should be read with some caution given the patchy historical revisions to quarterly data. By industry, agricultural output growth slowed as expected (1.2% y-o-y vs. 2.9% in Q2 2012) due to the deficient monsoons. However, growth in industrial output picked up modestly to 1.2% y-o-y (vs. 0.8% in Q1 2012) while services (7.1% y-o-y vs. 7.4% in Q2 2012) eased a tad.
Implications:
We are getting close to the bottom, although we are most likely talking about a "bathtub shaped" recovery with some bottom scraping
in coming quarters. The slowdown in headline growth was a disappointment, but it at least to some extent reflected factors not related to the underlying growth momentum. For example, the dry monsoons had a negative impact on agricultural output and the power outages, in August in particular, also pulled down growth.
Looking ahead, growth may end up moving, more or less, sideways in the near term. Beyond the near term, we expect a gradual recovery in growth assuming further traction on structural reforms and implementation of infrastructure related projects. Both can help alleviate supply side constraints and slowly revive the investment cycle. A gradual stabilization of global economic conditions next year should also help support the moderate recovery.
From the RBI's perspective, today's numbers have likely not reduced its reluctance to cut monetary policy rates. Inflation remains elevated and the decline in inflation and a narrowing of the external imbalances still depends on tangible progress on fiscal consolidation and structural reforms.
Bottom Line:
Growth in India is still being held back by the lack of investments in basic infrastructures and slow progress on structural reforms over the past few years. Near term growth will likely move sideways and, beyond that, only pick up gradually under the assumption that policy reform implementation is sustained.
Macroeconomic Overview – India
Will the downtrend continue? Oct WPI inflation eased unexpectedly
Source: HSBC Global Research/Bloomberg
Facts:
Headline WPI inflation fell unexpectedly to 7.5% y-o-y in October (vs. 7.8% in September), which was against market expectations of a rise to 7.9% and our expectations of 8.0%. In sequential terms, prices rose 0.5% m-o-m sa (vs. 0.7% in September) and 9.3% 3m/3m saar (vs. 9.5% in September). Core inflation (non-food manufacturing) eased to 5.2% y-o-y (vs. 5.6% in September) and 0.3% m-o-m sa (vs. 0.6% in September).
Implications:
A slowdown in food inflation helped reduce headline inflation and it may help ease broader inflation pressures if the downtrend is sustained. However, the easing in annual food inflation partly reflects a base effect caused by the October timing of the Diwalilast
year.
The decline in core inflation was encouraging and that will be an important cue for RBI if it continues to ease in coming months. However, the hike in diesel prices still has to pass fully through and underlying wage pressures remain firm. In addition, the supply-led nature of the slowdown in growth has left capacity relatively tight and this will keep underlying inflation pressures in place for a while still.
RBI will no doubt take some comfort from today's inflation reading, but one positive inflation surprise is not enough to materially reduce their reluctance to cut the policy rate given the lingering inflation risks. In this context, the elevated and sticky CPI readings as well as the continued upward revisions to historical WPI numbers remains a concern for the RBI. Moreover, the RBI is eagerly awaiting more concrete fiscal consolidation measures and continued policy reform implementation.
Bottom Line:
Headline inflation eased unexpectedly led by food and core inflation, which should provide the RBI with some comfort. However, this will not be enough to trigger an imminent rate cutting cycle given the lingering inflation risks and the need for more tangible progress on fiscal consolidation and other policy reforms
Macroeconomic Overview – India
Tainted by fickleness: Sep Industrial Production surprisingly contracts
Source: HSBC Global Research/Bloomberg
Facts:
Industrial production declined by 0.4% y-o-y in September (vs. 2.3% in August). This was below consensus expectation of 2.8% y-o-y and our 2.2% call. On a sequential bass, industrial production contracted by 2.2% m-o-m (seasonally adjusted) following the 1.6% m- o-m (sa) jump in August. On a 3m/3m (seasonally adjusted) basis, IP also fell a tad (-0.2% 3m/3m sa vs. -0.1% in August).
Implications:
September IP was a negative surprise and is testament to the external and structural headwinds that India's economy is still facing. However, the index yet again fell victim to the volatile nature of the capital goods segment, which makes the index increasingly difficult to predict and draw any clear directional clues from. The consumer goods segment pulled the index down as well, but this has also been volatile in recent months.
While the number may have made the RBI a bit uneasy, this one number is not enough by itself to change its overall assessment of relative inflation-growth risks. For that to happen, it would need to see slippage across a broader set of indicators and for longer.
We, consequently, believe that the RBI will remain reluctant to cut given the lingering inflation pressures. Moreover, it is also still keenly awaiting the announcement/implementation of additional structural policy reform measures and tangible steps to deliver fiscal consolidation.
Bottom Line:
Industrial production surprised on the downside, but mostly due to the fickle capital goods segment. Other indicators point to a stabilization in growth, suggesting the need for a healthy dose of caution when interpreting IP number.
Macroeconomic Overview – India
Gaining momentum: HSBC Nov manufacturing PMI up
Source: HSBC Global Research/Bloomberg
Facts:
HSBC's India manufacturing PMI picked up in November to 53.7 (vs. 52.9 in October) due to a strong rise in new orders (55.8 vs. 54.9 in October). The improvement in orders was largely led by overseas demand, with new export orders (55.9 vs. 53.6 in October) rising sharply. In response to the pick-up in orders, output growth (55.4 vs. 52.7 in October) picked up significantly and it could have been even better had it not been for power shortages experienced by firms.
Implications:
The manufacturing sector is starting to gather momentum with orders pouring in from both domestic and external sources. A nascent recovery in domestic investments and stabilization in external demand are likely behind the increase in order flows.
Worryingly, inflation pressures have not subsided despite the slow pace of growth. In fact, we are seeing inflation and price pressures pick up at the slightest recovery in demand. This is a reflection of the supply led nature of the slowdown, which have left firms operating under tight capacity and, therefore, kept underlying inflation pressures highly reactive to changes in demand.
The improvement in growth and the pick up in inflation signaled by the PMIs are is likely to keep the RBI inclined to remain on hold, notwithstanding the soft Q3 GDP reading. Should inflation risks begin to abate, partly on the back action to contain the fiscal deficit, and structural reforms inch forward, a window for rate cuts could open up early next year.
Bottom line:
Manufacturing PMI picked up on the back of a firm increase in new orders. However, inflation increased as well on the due to cost pressures and pricing power to pass these on to end consumers. This suggests that the RBI is likely to pause for a while longer.
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