Monday, September 2, 2013

PMI in China and GDP in Brazil and India

China’s official PMI index continued to improve reaching 51.0 in August, up from 50.3 in July.  The market was expecting a result around 50.6.  All the sub-indices improved with the new orders index rising from 50.6 to 52.4.  Stronger orders mean stronger production in the next few months which helps support the recent stabilisation in industrial production. This result makes me much more comfortable with my 7.6% GDP forecast for this year.

Our expectation for China growth this year was that exports would provide some positive impetus, fixed asset investment would likely decline further on the back of tighter credit conditions, especially manufacturing investment, while retail sales would most likely track somewhere in the middle.

The expected pick-up in China exports is based on our view of continued growth in Japan, at least before the consumption tax hike takes effect next year, stronger growth in America in the second half of the year and stabilisation in Europe.  In that respect the increase in the new export orders index from 49.0 to 50.2 was especially good to see.

From a policy perspective this also means the authorities are likely to continue the process of “fine tuning” with any new initiatives likely to continue to be small and aimed at the SME sector.

In Brazil Q2 GDP growth came in stronger than expected at 1.5% q/q, compared with average market expectations of around +0.9%.  Second quarter growth was always expected to show a relatively good result, but then be followed by some moderation in domestic demand in the second half of the year.  Indeed over the last few months we have lowered our calendar year forecast to 2.0% (annual average).  This latest result provides some upside to that forecast but given that most of the surprise in the Q2 result came from the agriculture sector, I’m wary that may reverse out over the next few months, so I will leave it where it is for now.

In India June quarter GDP printed at 4.4%, below consensus expectations and down from the 4.8% recorded in the March quarter.  The mining and manufacturing sectors both contracted over the quarter.   The services sector grew, but this appeared to be government spending related.

Looking ahead we expect growth in India to slow further in next few months due to the recent tightening in financial conditions.  We expect the RBI will cut rates again but only once the pressure on the exchange rate has diminished.  That means my current forecast of 5.6% growth this year is looking optimistic and will be revised down.  Watch this space.