JP Morgan: 4Q GDP growth moderates as government spending wanes but PMI rises again

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India: 4Q GDP growth moderates as government spending wanes but PMI rises again

Consistent with expectations, 4Q2010 GDP growth moderated to 8.2% oya from 8.9% in the first half of the fiscal year The moderation was largely on account of a sequential decline in government spending even as agricultural production grew robustly Quarterly expenditure data suggests that gross investment continues to stagnate even though questions remain on data quality Manufacturing PMI rose for a second successive month driven by an increase in new orders and a sharp rebound of new export orders The January trade deficit rose from its December lows but to a more moderate level of $8 billion, in line with expectations 4Q GDP growth expectedly moderates India’s 4Q2010 GDP growth moderated to 8.2 % oya (0.9 % q/q, saar) from 8.9 % oya in the first half of the fiscal year. While growth was widely expected to slow in this quarter after surging in the previous quarter (13.5 % q/q, saar) the extent of the moderation was more than what the market had expected (Consensus 8.6 % oya, JP Morgan 8.1 %). On the production side, agriculture growth surged (8.9 % oya, 13.4 % q/q, saar) reflecting a strong winter harvest to complement a robust summer crop. It is instructive to note that despite strong agricultural production all year food inflation has continued to stay stubbornly high and broad-based reflecting the demand pressures at play. Industry expectedly slowed sharply in the quarter, consistent with the moderation of industrial production over the last few months. We have been arguing for a while that IP growth has increasingly been driven by a very narrow base (capital goods and consumer durables which account for less than 15 percent of the basket). With the private investment cycle yet to pick up in earnest, capital goods production has been driven primarily by public investment. With signs that government spending has slowed in recent months, growth in capital goods production has abated sharply and pulled IP growth down with it. It is important that the private investment cycle turn on soon if IP growth is to be buoyant in the coming quarters. Services growth, too, moderated in the 4Q primarily on account of a sharp moderation in growth of community, social and personal services (4.8 % oya, -9.2 % q/q, saar), which serves a s a proxy for government spending. As we have repeatedly pointed out (see “India: government consumption boosts 3Q growth to 8.9 %”, November 30, 2010), growth in the first half of the fiscal year (April-September, 2010) has been driven by a continuation of the fiscal stimulus. With government spending finally showing signs of abating in 4Q, it is unsurprising that growth has moderated. This phenomenon is more clearly seen on the expenditure side. Government consumption which surged in 3Q (10.4 % oya, 64.6 % q/q, saar) tapered off sharply in 4Q (- 3 % oya, -20.9 % q/q, saar) causing growth to moderate with it. Investment growth remains sluggish, but data concerns remain The expenditure side data also confirm that investment in 4Q remained sluggish growing at only 6.3 % oya (-16.8 % q/q, saar). This is consistent with the fact that imports fell sharply on a sequential basis (- 30.5 % q/q, saar) in 4Q, confirming that there was no pick-up in the capital and intermediate good imports that serve as inputs into fixed investment. A sustained slump in the private investment cycle constitutes a significant downside risk for growth in FY12 in light of the fact that the government is targeting an ambitious fiscal consolidation in FY12 (see, “FY12 budget surprises positively but beware of the fine print”, February 28) and even partial success towards that end would result in a significant withdrawal of stimulus from the economy. That said, issues remain with quarterly expenditure estimates of GDP. For example, gross capital formation was estimated to grow at over 20% in 2Q and almost 17% in 3Q – which seem completely at odds with other indicators in the economy. PMI rises for second successive month The February manufacturing PMI rose to 57.9 from 56.8 the previous month, marking the second successive month that it has risen. The increase was driven by a substantive increase in new orders (1.5 points) and a sharp increase, in particular, in new export orders (+ 3 pts) – which rebounded after declining for two months. Actual export realizations track PMI new export orders closely with a 2-3 month lag. As such, today’s sharp increase suggests that the robust growth witnessed in merchandise exports over the last few months is not an aberration but likely to sustain for some more time, at least. Input prices continue to rise On a more sobering note, input prices continued their upward march and have now risen for 9 consecutive months. However, the output price index did not rise commensurately in February, suggesting that margins continue to come under pressure. Recall, the output price index had risen for two consecutive months in December and January in response to sharp input price increases in previous months. The fact that input prices continue to rise suggests that pressures for output prices to rise further will continue to mount. Trade deficit rises but to a more moderate level The trade deficit for January rose to $8 billion from $2.6 billion in December. This was largely expected as December’s trade deficit was seen as an aberration caused by the confluence of surging exports and a sequential decline in both non-oil and oil imports. The rise of the trade deficit back to the $8 billion levels takes it back to the average levels observed since September of 2010. Recall, the trade deficit had widened to $12-13 billion in the summer, and the fact that it has settled in the $8-9 billion levels since then is one of the key reasons that the current account deficit for FY11 is likely to print below 3% of GDP and the INR has held up well despite rising crude prices. Exports continued their healthy year-on-year growth rates in January (32.4 % oya) but declined on a sequential basis (-5.5 % m/m, sa), a likely payback for surging sequential growth in the previous two months. Imports grew at 13.1 % oya driven by a sharp rise in non-oil imports (23.9 % oya, 20,5 % m/m, sa). It is too soon to judge whether the rise in non-oil imports is just a payback to the fact that it has declined for 3 of the last 4 months, or whether it points to something more promising. Surprisingly, oil imports continued to decline on a year-on-year basis (-7.8 % oya) despite rising crude prices, suggesting that import volumes fell again compared to a year before.