Global economy in stutter mode
The world economy’s growth prospects for the current year seemed somewhat dented on Monday, with China’s manufacturing growth suffering the steepest drop in a year in April and the sector’s expansion easing from the March level in both the euro zone and India. The latest data also revealed that the US’ manufacturing industry that came off the relatively robust levels six months ago was yet to rebound.
At a time when India’s export-oriented industries have been hit hard by weak global demand (exports contracted for the fourth straight month in March and posted a 67-month-low growth of -21.0%), the headline HSBC India Purchasing Managers’ Index for the country for April released on Monday compounded policymaker’s worries as it fell to 51.3, down from 52.1 in March, on weak domestic orders.
Although last week’s US Federal Reserve decision, guided by lower-than-expected first-quarter growth, is interpreted to show its lack of intent to raise borrowings costs until next year (something that could help emerging market economies), India’s own economic data barely reflect any sharp pick-up in aggregate demand. Even as the government, ostensibly laying emphasis on project implementation, is anxious to see investment activity decisively picking up, recent incremental data haven’t given it any comfort.
The output growth of core sector industries fell to a 17-month low of 0.1% in March and the IMD signalled a below-average monsoon ahead.
The Reserve Bank of India’s consumer confidence survey recently suggested that although urban consumption demand might pick up in the near term, with the rabi harvest damaged by unseasonal showers, rural demand would remain subdued. Although notorious for volatility, capital goods output – a proxy for fixed corporate investment – witnessed a slowdown in growth to 8.8% in February from 12.5% in the previous month.
On top of these, Monday’s HSBC-Markit survey revealed that manufacturers could not attract fresh orders despite cutting selling prices for the first time since May 2013. Although the headline HSBC manufacturing PMI marked its 18th successive month above the 50 level that separates growth from contraction, in April a sub-index monitoring new business and denoting underlying demand fell to 51.9 in April from 53.2 while firms also reduced staff strength last month.
The Modi government, which has started facing criticism from corporate India on delayed and inadequate delivery on growth-enhancing policies, would have to try and flag some reforms expeditiously to prevent a simmering discontent from crystallising, analysts said. It has to complement the increased public investments in railways and roads and the steps taken to boost coal production with the more difficult policy reforms like the goods and services tax (GST), easing of labour laws and land acquisitions. Most of these reforms could, however, stumble on legislative road blocks given the Opposition’s stubborn refusal to support them.
“The data supports a rate cut. They (the RBI) will continue cutting rates but slowly, perhaps waiting until the upcoming (June 2) meeting ,” said Pollyanna De Lima, economist at Markit. This view is buttressed by other analysts given that retail inflation stayed below 6% since September. “Despite recording softer rates of expansion, the Indian manufacturing sector held its ground in April, benefiting from ongoing improvements in operating conditions,” De Lima said, but added, “.we are yet to see growth leading to meaningful job creation, as the index measuring employment has shown little change to staff numbers since the beginning of 2014”.
The HSBC/Markit PMI for China fell to 48.9 in April, the lowest level since April 2014, from 49.6 in March, as demand faltered and deflationary pressures persisted. “The PMI data indicate that more stimulus measures may be required to ensure the economy doesn’t slow from the 7% annual growth rate seen in Q1,” said Annabel Fiddes, an economist at Markit.
Euro zone manufacturing growth eased in April but factories raised prices for the first time in eight months and headcount rose at the fastest pace in nearly four years had a marginal impact on growth. (Markit’s PMI stood at 52.0, shy of March’s 10-month high of 52.2). The European Central Bank would welcome signs of inflationary pressure, given that it could dent growth only marginally.
As for the US, the HSBC PMI for April reflected no change from March, but the Commerce Department said on Monday new orders for manufactured goods increased 2.1%, the largest gain since July last.
The International Monetary Fund had said that India would likely grow 7.5% in the current fiscal, pipping China as the world’s fastest-growing large economy, thanks to recent policy reforms, a consequent pick-up in investment and lower oil prices. Although the multilateral agency capped its global growth projection for 2015 at 3.5%, the same level as was forecast in January, it trimmed the US expansion forecast by 0.5 percentage point and 0.2 percentage point for 2015 and 2016, respectively, from earlier projection levels, to 3.1% for both years.