Has the macro outlook improved?
Whether the brightened macroeconomic prospects will sustain is a key question given past trends and possible risks
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Following the Reserve Bank of India’s rate cut on 4 October, a gamut of macro data was released last week. Some lead economic indicators have come out too. The outlook appears positive overall but whether this buoyancy sustains beyond the festive season is an open question. Many a time in recent years, the occasionally positive economic pointers have failed to endure beyond a quarter or few months. Adding to the uncertainty is a number of risks on the horizon.
Macroeconomic statistics have been positive for September as far as prices and exports go: Both headline consumer and wholesale inflation rates cooled more than expected to 4.31% and 3.57% from 5.1% and 3.74%, respectively, in August. Export growth was 4.6% with easing of the contraction in nonoil import growth, an indicator of domestic demand. Car sales’ growth was strong at 15% after an average 9.5% in the preceding two months.
However, the expansion in both services and manufacturing production slowed in September according to the Nikkei’s Purchasing Managers’ Indices (PMIs). This pulled down the Composite PMI Output Index sharply to 52 from 54.7 in August, reflecting that the economy lost momentum. Matching this, industrial production data showed a -0.7% contraction in August following a -2.5% decline in July; compared to last year’s 4.1% growth in April-August, corresponding industry output is down to -0.3% this year.
Mixed signs on current economic conditions therefore. But growth expectations are exceedingly positive. For instance, the inflation outturn has sparked hopes of further monetary easing at the year-end. And consumer spending is anticipated to be robust owing to a normal monsoon and recent salary increases of central government employees.
Such a picture, however, is not new. It is consistent with a pattern in recent times when things have suddenly brightened and triggered prospects of more acceleration. The upturns have not lasted though, with most indicators flagging down after a few months. It needs to be seen therefore if this time is different, a break from the past pattern or not.
There are a number of risks, almost all of which seem skewed to the downside at this juncture. Potential ones include financial market turbulence that could affect financial conditions abroad—US bond yields are up 34 basis points since July, with spillover spreading to Europe. This has negative implications for capital inflows and monetary policy. Another key risk is crude oil prices, which have climbed 13% in October over the previous month and is at about $50 per barrel. It threatens the RBI’s baseline $46 per barrel assumption for the second half of this financial year. As petrol-diesel price increases pass through, the second-round effects will affect core inflation that otherwise moderated in September when measured excluding the transport & communication price component. Finally, there is the risk of subduing global demand, where the scenario is coloured by contracting trade volumes, reduction of potential output in some advanced countries and shocks like the Brexit.
The sustainability of brightened macroeconomic prospects is an issue in this light.
Renu Kohli is a New Delhi based economist.