PMI data underlines stronger recovery pace in manufacturing
PMI data underlines stronger recovery pace in manufacturing
What’s more, the PMI rose to 55.7 in May compared with 53.3 in April, which indicates that the strength of the expansion has been increasing. Also, the New Orders sub-index rose to 59.1 in May, the highest since last September.
Economists are now becoming increasingly convinced that recovery is gathering pace and have started revising their GDP forecasts upwards. For example, Sonal Varma, economist with Nomura Securities, has revised her GDP forecast for FY10 from 5.3% to 6.3%, citing resilient investment and easier financing. Rohini Malkani, economist with Citigroup, has also revised her forecasts higher, “on the back of the election results and incorporating the CSO’s (Central Statistical Organization) new numbers for FY09, we are revising our FY10 GDP from 5.5% to 6.8% and FY11 GDP from 6.6% to 7.8%. The upward revision is primarily due to higher investment growth". It’s no surprise, then, that the stock market continues to rise.
The continuing contraction in exports, though, has been a worrying sign, although HSBC economist Robert Prior-Wandesforde points out: “It is worth noting that the base effect for exports was extremely challenging in April, suggesting that an unchanged year-on-year result is consistent with a strong month-on-month seasonally adjusted increase. The same cannot be said of imports, although the sharpness of the drop has more to do with big year-on-year commodity price falls than volume effects." That said, it’s also worth noting that while India’s exports contracted at 33% y-o-y in both March and April, the fall in South Korea’s exports was 20% in April, while Chinese exports fell 22.6% in that month and 17% in March. In other words, the contraction in Indian exports was worse than for countries such as South Korea and China. With Korean exports falling by 28.3% in May, it’s very likely that the weakness in external demand for Indian exports, too, will continue, thrusting the entire burden on the recovery on the domestic sector.
Incidentally, as Kotak Mahindra Bank economists Indranil Pan and Kaushik Das underline, there has been a slight improvement in non-oil imports in April over March (in absolute terms). That fits in snugly with the expansion in the PMI seen in April. Extrapolating the trend will mean that non-oil imports will rise in May, in tune with the higher PMI, which, combined with higher oil prices and stagnant exports, will mean a higher trade deficit.
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