The HSBC Purchasing Managers’ Index (PMI) for manufacturing confirms that the Indian economy is seeing a moderation in the pace of growth. Is it a reason to start worrying about the growth momentum? Well, the PMI numbers do not indicate any cause for concern, simply because the deceleration in growth that they show is very gradual.
The HSBC Manufacturing PMI came in at 57.5 for May, a slight slowing from the pace of growth seen in the preceding three months. A closer look, however, shows that the manufacturing PMI is still above the readings of September, October and December 2010 and January 2011, and indeed, it’s above the readings for much of last year. The PMI surveys reflect seasonally adjusted month-on-month increases. A reading above 50 signifies expansion, while one below 50 indicates a contraction. The reading of 57.5 for May, therefore, does indicate that while the economy is slowing, its rate of growth is still strong.
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What about prices? Well, the input price index fell rather sharply in May, on account of the fall in commodity prices, but it’s still at 63.4, which means the pace of increase continues to be very high. On the other hand, output prices were up a bit, showing that companies are able to pass on at least a part of their cost increases, although not all, as seen from the pressure on their margins.
In other words, the PMI data give no room for comfort at the Reserve Bank of India (RBI) and the rate tightening is likely to continue. On the other hand, the slowdown in China is much more pronounced. The HSBC Manufacturing PMI for China was at 51.6 in May, which is a 10-month low. In Taiwan, it was 54.9; in South Korea, it was 51.2 a six-month low. Manufacturing growth in India is still much more robust that in these economies.
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The new orders component of the India PMI index fell a bit in May, but it continues to be strong. What’s interesting is the fall in the new export orders index, which has been decelerating steadily for the past few months. That correlates with the deceleration in export growth seen from the government trade data. The chart shows the steady deceleration in both export and non-oil import growth since February this year. Growth in non-oil imports is often taken as an indicator of the strength of investment demand, because of project imports. The slowdown there ties in with the GDP numbers, which showed a huge fall in investment demand in the economy.
On the other hand, the slowing pace of export growth ties in with the PMI data coming in from export-oriented economies such as China and South Korea. In China, the May PMI data shows a decline in new export business for the first time in three months. Growth in both Europe and the US, too, has been sluggish—the US is seeing a double-dip in housing, while the Markit Eurozone Manufacturing PMI eased to a seven-month low in May.
So we’re seeing a slowdown in investment demand and in exports. Will we also see consumer demand, the driver of the economy in the March quarter, slow down? Most analysts haven’t pencilled that into their estimates yet, arguing that higher wages will buoy consumption demand. Nevertheless, the March IIP data showed that the pace of growth in consumer goods decelerated in March, while consumer durables showed negative month-on-month growth. Data from car sales also show sluggishness. So consumption growth too might have reached its limits.
But surely all this is already baked into market prices? The MSCI index fell by 4.4% in May and was down 10.4% year to 31 May 2011. Contrast the MSCI Emerging Market Asia index, up 3.1% year to 31 May. Or the MSCI World index, up 5.8% year to date.
It’s less clear, however, whether the soft economic data coming out of the US and the concerns about the European periphery too have been discounted. In the short run, the huge amount of liquidity will lead to quick moves in and out of asset classes, with little regard to the fundamentals. But the end of the second round of quantitative easing in the US as well as rate hikes in Europe and the move towards more fiscal responsibility in the developed world will also have an impact on liquidity, while on the positive side, a moderation in growth and liquidity should keep commodity prices under leash.
While the slowdown in India may have been discounted and the downside therefore limited, the fact remains that slower global growth and lower liquidity do not make a combination that supports asset prices.
Graphic by Paras Jain/ Mint
Manas Chakravarty looks at trends and issues in the financial markets. Comment at firstname.lastname@example.org