A day after the June quarter gross domestic product (GDP) growth rate figure came in at a strong 8.8%, the HSBC Manufacturing Purchasing Managers’ Index (PMI) for August confirmed that manufacturing growth continues to remain strong. The PMI for August was at 57.2, which indicates robust growth; any reading above 50 signifies expansion. And this is month-on-month seasonally adjusted growth, free from the vagaries of the base effect. Also, non-oil imports in July increased 49.6% year-on-year, an indication of the strength of domestic demand.
That said, the PMI was a bit lower than July’s 57.6. The pace of expansion has been steady in the last three months, with only marginal changes.
Looking ahead, however, there are hints of a slowdown. The new orders to inventory ratio, often taken as a leading indicator, has fallen a bit, which suggests that the rate of growth of manufacturing output is likely to ease further in the coming months. Moreover, export growth in July was down to 13.2% year-on-year and the value of exports in July was lower than in June.
Graphic: Yogesh Kumar/Mint
Interestingly, while input prices rose, output prices came down. This is in accordance with the pressure on margins seen from the June quarter corporate results. It also fits in with the fall in non-food manufacturing inflation seen in the July Wholesale Price Index. As a recent Federation of Indian Chambers of Commerce and Industry (Ficci) report has shown, there’s still some spare capacity and that’s the reason the price increases haven’t been more dramatic. The July services PMI showed a slackening in the pace of growth in services.
What about the slowdown in the rest of the world? The Markit/CIPS UK Manufacturing PMI was at 54.3 in August, which indicates continued expansion, but it’s at a nine-month low. The Markit Euro zone Manufacturing PMI, at 55.1, is also at a six-month low. Growth in both the UK and Europe is slowing. Taken together with widespread expectations of a US slowdown, that doesn’t augur too well for exports. But there’s good news from China, where the HSBC manufacturing PMI was at 51.9, up from a small contraction in July. That suggests a soft landing for the Chinese economy and should support commodity prices. Interestingly, though, the new export orders component of manufacturing PMI was weak both in China and South Korea. For the India PMI, too, the new export orders component for August is well below that for July. In short, the external environment is not comfortable.
But though there may be an easing off of growth, domestic demand continues to be strong. That seems to indicate that the tepid trend in output price increases could be temporary. In other words, the Reserve Bank of India should continue efforts to cool domestic demand.