Whether the current moderation in growth is just a soft patch or will develop into a full-fledged slowdown is the topic du jour among macro analysts.
Citigroup Inc.’s economists Rohini Malkani and Anushka Shah have asked precisely that question in their report on the June manufacturing Purchasing Managers’ Index (PMI) survey for India. They point out that the reading is the lowest since September and that a host of other indicators, including decelerating auto sales and moderating credit demand, all point to lower growth ahead. Nevertheless, their conclusion is that the deceleration is just a “soft patch” and a pickup in growth can be seen in the second half of the year. Their reasons are: a revival in Japan, easing commodity prices and, at the domestic level, recent project clearances.
Also See | PMI manufacturing survey (PDF)
There are, however, some worrying trends. One of them is the fact that growth in the stock of purchases has fallen rather sharply—this implies producers are not adding to inventory. Add to that the deceleration in the new orders index and it does seem that two leading indicators of future production growth are flashing red for India.
Frederic Neumann, co-head of Asian Economics at HSBC Holdings Plc, has calculated the difference between the readings for the new orders index and the inventory index—which serves as a leading indicator—for several economies. High new orders combined with low inventory imply higher production in future. For both the new orders and the inventory indices, as for all the PMI indices, a reading above 50 signifies expansion and a reading below 50 implies contraction. (The readings are all for the manufacturing PMIs).
The chart shows that this metric (the reading for new orders minus the reading for inventory) has been coming down for India, the US, the euro zone and Taiwan. The reading for China is indeterminate, although it also shows a lower reading in June compared with May. This indicator for the UK shows a little bounce in June, although it’s still well below the level for March and April. Note also that this metric, although coming down, is still very high for India, which suggests growth will slow, but will remain strong. For most economies, this leading indicator is showing a downturn.
David Hensley, director of Global Economics Coordination at JPMorgan Chase and Co., believes that there are tentative signs the global manufacturing PMI is nearing a bottom and said: “We continue to anticipate gradual improvement in global industry this summer, which will be signalled by a lift in the PMI new orders index.”
As the second chart shows, however, the Global New Orders index for the manufacturing PMI shows a continuous fall since the beginning of this year. In short, the leading indicators from the PMI manufacturing surveys continue to point to a global slowdown.
Graphics by naveen Kumar Saini/Mint