Global manufacturing, according to the JPMorgan Global Manufacturing Purchasing Managers’ Index (PMI), rose to a 70-month high in March. The last time the Global Manufacturing PMI was at the March level of 56.7 (a reading above 50 signals expansion; one below 50 signals contraction from the preceding month) was in May 2004, which reinforces the view of those who believe that the global economy is now roughly around the same place it was at in 2004—the often unstated premise being that we’re at the beginning of a long boom. The improvement in the global economy is reflected in India’s exports, which were up a huge 34.8% year-on-year (y-o-y) in February.
The recovery is bringing in its wake higher input prices. According to the JPMorgan PMI report, purchase price inflation hit a 19-month high in March. According to the report, “part of the increase reflected supply-chain factors, as highlighted by the sharpest lengthening in vendor lead-times since June 2004”. One indicator of the recovery is the 18-month high in crude oil prices. It’s unlikely, though, given the state of excess global manufacturing capacity, for the rise in input prices to result in general inflation.
Graphic: Ahmed Raza Khan/Mint
But things could be different in countries where growth is high, such as India. This is what the HSBC India manufacturing PMI for March had to say: “Average cost burdens increased sharply across India’s manufacturing economy. Moreover, the rate of input price inflation accelerated to a series record pace. Panel members linked elevated purchasing costs to increased raw material prices, alongside higher taxes. Companies attempted to cover part of their greater cost burdens by raising their tariffs at a marked pace.” That’s not all—the report talks of capacity pressures at suppliers, with a deterioration in vendor performance and supply lead times. Those surveyed reported shortages of raw materials and power cuts.
That the pace of the recovery is accelerating (along with higher raw material prices) is also seen in the 55.6% y-o-y rise in non-oil imports in February. The net result is likely to be: a) a recovery in capital expenditure, as the limits to capacity are being reached; b) the first signs of overheating—as in shortages of raw materials and higher wages and c) the return of pricing power, as seen in the recent hike in steel prices.
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