Food prices are killing growth literally. India’s official inflation index, the WPI (Wholesale Price Index) rose by 6.46% year on year for the month of September 2013, largely driven by the food index, which has a 14.3% weight in the general index, that rose by a whopping 18.4%. The non food manufacturing index rose by just 2.1% indicating weakness in pricing power amongst manufacturers on the back of weak aggregate demand.
China saw its official inflation index the CPI (Consumer Price Index) rise to a seven month high of 3.1% year on year, driven by food prices that rose 6.1% led by vegetable prices that rose 18.9%. China’s CPI is below government’s threshold rate of 3.5% but has risen from levels of around 2% over the last few months. However producer price index in China fell year on year for the 19th straight month in August indication weakness in pricing and demand in the economy.
China’s export data for the month of September showed a surprise fall of 0.3% against consensus estimates of 6%. China official growth estimates for 2013 is pegged at 7.5% and with high food inflation and weak exports the country could see growth levels trend down. China has seen a slight recovery in manufacturing over the last two months from a recessionary trend seen for many months previous to August 2013.
India is seeing weakness in growth with IIP (Index of Industrial Production) growth at just 0.1% for the April-August 2013-14 period. Automobile sales data show that passenger cars and commercial vehicle sales are down 4.7% and 15.3% in the April-September 2013 period reflecting weak consumer and commercial demand in the economy. Tax collection growth is at 10.66% in the April- September 2013 period against budgeted levels of 17.5% for the full fiscal year. Corporate tax growth is at 8% levels indication low corporate sector profitability.
IMF has pegged India’s fiscal 2013-14 GDP growth at 3.8% levels while Government and the RBI are placing growth at 5% and above levels. India’s GDP growth for 2012-13 was at decade low rates of 5% and first quarter 2013-14 GDP growth was at 4.4% and the economy will have to grow at average of around 5.3% for the next three quarters to achieve full year growth rates of over 5%.
RBI is constrained on growth driven monetary policy on two counts. One is food inflation that is keeping up overall inflation expectations and the other is the Indian Rupee (INR) that is vulnerable to inflation, growth and global monetary policies. RBI raised the benchmark policy rate the repo rate in its 20th September 2013 policy review and is widely expected to raise the policy rate in its 29th October policy review. However even while raising the repo rate, the central bank is trying to address tight liquidity conditions in the system that is borrowing over Rs 100,000 crores from the RBI to fund everyday liquidity requirements. RBI has reversed a part of its INR stability policies by bringing down the MSF rate by 125bps since 20th September but the central bank is still wary of further fall in the currency on risk aversion sell off by markets.
The government is fiscally constrained to push growth. Lower than budgeted tax collections is forcing the government to bring down its plan expenditure to keep the fiscal deficit at budgeted levels of 4.8% of GDP. Higher than budgeted fiscal deficit is INR negative and the government does not want the currency to weaken to below record low levels of Rs 68.80 that it saw in August 2013.
The US Federal Reserve revised its growth forecast for the US economy for 2013 and 2014 on the back of a slower than expected rise in jobs. The US economy added 169,000 jobs in August against a revised 104,000 jobs in July. July numbers were revised down from original estimates of 162,000 job additions. US unemployment rate fell to 7.3% levels against levels of 7.4% seen in July 2013. Fed is of the belief that job growth should be much higher if unemployment rate has to fall to levels of 6.5%.
The budget standoff in the US congress has led to economic data release being delayed and September data on employment is yet to be released. The shutdown of the US government is costing the economy at least USD 150 million a day and this could lead to ripple effects on growth going forward. US consumer confidence fell to a nine month low in October, which is not a good sign for holiday season sales.
Eurozone manufacturing index fell in September from August but stayed above the 50 mark that separates contraction from expansion. Eurozone consumer confidence and retail sales are showing rising trends. Unemployment rates, while staying elevated at 12% levels have show declines in the number of people out of work in the months of June, July and August. The ECB has pledged to maintain rates at record low levels until there is improvement in the Eurozone economic conditions. Bond yields of indebted sovereign nations such as Italy and Spain have fallen by 200bps from highs seen in 2012 and the Euro has gained over 8% against the USD from lows seen in 2012. Eurozone economy is steadying itself and while it has a long way to go for recovery, the extreme volatility seen in the years 2011 and 2012 has subsided.
Table 1: India Macroeconomic Data September 2013