Manufacturing PMI at eight-and-a-half year low, but optimism at 11-month high
The disruption in the manufacturing sector on account of the introduction of the goods and services tax (GST) pulled down the Nikkei India Manufacturing Purchasing Managers’ Index to 47.9 in July, its lowest level since February 2009. A reading below 50 denotes contraction in activity from the previous month. The PMI survey covers only the formal sector and the extent of disruption in the informal sector is likely to be much worse.
The chart shows that the New Orders index also fell below 50 in July and the fall in this index was at the steepest pace since early 2009. Pollyanna de Lima, principal economist at IHS Markit, said the downturn was across all sectors covered by the survey, with firms in the consumer, intermediate and investment sectors all scaling back output in July on account of GST.
The good news is that the downturn is expected to be temporary. The chart shows that the Future Output index, which measures manufacturers’ expectations about future production, is at an 11-month high, indicating that producers are optimistic the downturn will not last. What’s more, the July manufacturing PMI also shows muted inflationary pressures, which should help the Reserve Bank of India to cut its policy rate on Wednesday. Says de Lima, “The weakening trend for demand, relatively muted cost inflationary pressures and discounted factory gate charges provide powerful tools for monetary policy easing, which has the potential to revive economic growth.”