„ Monthly production’s downward surprise in June suggests industrial value added is likely to
have fallen in Q1 FY2014, while various indicators point to slower private services activity.
„ Faster government spending and agricultural output growth should have offered some help
but will not have been strong enough to prevent headline GDP growth from sliding further.
„ Our tracking estimate now pegs Q1 FY2014 GDP growth at 4.4% y/y, which would mark the
worst quarterly performance for a more than decade outside of the global financial crisis.
„ Unless ‘quantitative tightening’ is reversed quickly, downside risks to our below-consensus
GDP forecasts will continue to crystallise, ensuring that GDP growth has a ‘4 handle’.
On the back of May’s weak industrial data and RBI’s recent ‘quantitative tightening’ measures,
we have recently revised down our expectations for GDP growth in FY2014 to 5.2% (see India:
Quantitative tightening (for now) and India: The beatings will continue). But the latest stream of
data suggests downside risks to even our below-consensus GDP forecast continue to build.
In a latest sign of India’s economic slowdown gathering pace since the turn of the financial year,
provisional data released late yesterday showed industrial production surprising significantly to
the downside with a 2.2% y/y decline in July, the second annual drop in a row. June’s
disappointment also came along with a sizable downward revision to May’s reading to -2.8% y/y
from -1.6% as initially reported. Capital goods output, which, over time, corresponds closely to
the national accounts measure of fixed investment, was the key culprit behind the weak
performance over the past few months as business confidence appears to be collapsing but
weakness also looked increasingly evident in the consumer goods sector. June’s industrial
report completes the full complement for Q1 FY2014, with overall production contracting by an
estimated 3.6% q/q or 13.6% q/q annualised, pointing to an annual contraction of close to 0.5%
in industrial valued added in the national accounts after a 2.0% y/y gain in Q4 FY2013 (Chart 1).
Gauging momentum in the services segments is less straightforward. But we have developed a
coincident indicator which draws on the main indicators that RBI includes in its quarterly
assessment of the ex-industrial economy and offers a good guide to growth in private services
and construction. The indicator suggests growth in private services and construction activity
combined may have slowed to the weakest post-GFC in q/q terms, an assessment corroborated
by the latest PMI non-manufacturing survey. Adding in our assumption of faster community
services growth in line with the monthly fiscal data after the strict fiscal spending control late last
year (Chart 2), however, overall services and construction growth should still have seen some
sequential improvement in Q1, leaving the y/y rate down slightly from Q4 FY2013.
A better agriculture economy as output continued to recover from the weak monsoon last year
will not have been strong enough to offset weakness in the non-agricultural sector. Our tracking
estimate now pegs Q1 GDP growth at 4.4% y/y or 3.7% annualised (vs. 4.6% as previously
anticipated), which would mark the second-worst quarterly performance since June 2003 after
the GFC-induced low of 3.5% in March 2009. While still the envy of many developed countries,
our GDP forecast of 4.4% y/y would be well short of the post-GFC potential rate of c.7%. Unless
‘quantitative tightening’ is reversed quickly, downside risks to GDP will continue to crystallise,
ensuring that GDP growth has a ‘4 handle'.
��
have fallen in Q1 FY2014, while various indicators point to slower private services activity.
„ Faster government spending and agricultural output growth should have offered some help
but will not have been strong enough to prevent headline GDP growth from sliding further.
„ Our tracking estimate now pegs Q1 FY2014 GDP growth at 4.4% y/y, which would mark the
worst quarterly performance for a more than decade outside of the global financial crisis.
„ Unless ‘quantitative tightening’ is reversed quickly, downside risks to our below-consensus
GDP forecasts will continue to crystallise, ensuring that GDP growth has a ‘4 handle’.
On the back of May’s weak industrial data and RBI’s recent ‘quantitative tightening’ measures,
we have recently revised down our expectations for GDP growth in FY2014 to 5.2% (see India:
Quantitative tightening (for now) and India: The beatings will continue). But the latest stream of
data suggests downside risks to even our below-consensus GDP forecast continue to build.
In a latest sign of India’s economic slowdown gathering pace since the turn of the financial year,
provisional data released late yesterday showed industrial production surprising significantly to
the downside with a 2.2% y/y decline in July, the second annual drop in a row. June’s
disappointment also came along with a sizable downward revision to May’s reading to -2.8% y/y
from -1.6% as initially reported. Capital goods output, which, over time, corresponds closely to
the national accounts measure of fixed investment, was the key culprit behind the weak
performance over the past few months as business confidence appears to be collapsing but
weakness also looked increasingly evident in the consumer goods sector. June’s industrial
report completes the full complement for Q1 FY2014, with overall production contracting by an
estimated 3.6% q/q or 13.6% q/q annualised, pointing to an annual contraction of close to 0.5%
in industrial valued added in the national accounts after a 2.0% y/y gain in Q4 FY2013 (Chart 1).
Gauging momentum in the services segments is less straightforward. But we have developed a
coincident indicator which draws on the main indicators that RBI includes in its quarterly
assessment of the ex-industrial economy and offers a good guide to growth in private services
and construction. The indicator suggests growth in private services and construction activity
combined may have slowed to the weakest post-GFC in q/q terms, an assessment corroborated
by the latest PMI non-manufacturing survey. Adding in our assumption of faster community
services growth in line with the monthly fiscal data after the strict fiscal spending control late last
year (Chart 2), however, overall services and construction growth should still have seen some
sequential improvement in Q1, leaving the y/y rate down slightly from Q4 FY2013.
A better agriculture economy as output continued to recover from the weak monsoon last year
will not have been strong enough to offset weakness in the non-agricultural sector. Our tracking
estimate now pegs Q1 GDP growth at 4.4% y/y or 3.7% annualised (vs. 4.6% as previously
anticipated), which would mark the second-worst quarterly performance since June 2003 after
the GFC-induced low of 3.5% in March 2009. While still the envy of many developed countries,
our GDP forecast of 4.4% y/y would be well short of the post-GFC potential rate of c.7%. Unless
‘quantitative tightening’ is reversed quickly, downside risks to GDP will continue to crystallise,
ensuring that GDP growth has a ‘4 handle'.
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