Market Review
Divergent growth trends across different regions continued with economic activity in US remain resilient while that in EU and China subdued. US growth momentum was bolstered by resilient consumption and healthy domestic capex along with buoyant services sector. Over last few months, however, rising unemployment rate, weakening non-farm payrolls data, easing job openings to unemployed ratio etc. indicates labour market is cooling. Further, activity of select segments of US economy like manufacturing and housing remained lacklustre. Eurozone continues to witness soft growth as reflected in consistently weak PMIs. China continues to experience broad based slowdown with persistent weakness in its real estate sector, softness in manufacturing and infrastructure investments along with decline in industrial profit. China’s export growth accelerated in recent months but outlook is uncertain in view of incoming Republican government in the US which is expected to take charge January 2025.
Inflation has moved within a narrow range as largely on expected lines across most major economies. Consequently, most major central banks continue to remain in easing mode.
India’s GDP witnesses broad based slowdown in Q2FY25: India’s real GDP growth in Q2FY25 plunged to 5.4%, significantly below consensus estimate of 6.5%. Broad based weakness visible in Q2FY25 relative to last quarter was driven by deceleration in investment spending (5.4% vs 7.5%) and consumption (6% vs 7.4%). Softness in consumption could partly be attributable to weakness in urban consumption as indicated in corporate result commentary for Q2FY25 and high frequency indicators while investment was impacted due to low government capex spending. This was partially offset by pick up in GFCE and export growth outpacing import.
On the GVA side, growth moderated driven by sharp slowdown in manufacturing reflecting weak corporate profitability. While construction services growth eased on back of contraction in government capex spending, mining sector and utilities remained subdued due to average rainfall during the period adversely impacting activities. Services sector growth was stable relative to last quarter.
Source: CMIE
While Q2 growth has disappointed, slowdown appears to be cyclical in nature (and not structural) and growth is expected to improve over the coming quarters aided by festive demand and sustained recovery in rural sector.
Indian economic activity mixed: The high frequency indicators point at conflicting trends. Rural demand showed resilience as reflected in strong retail registration of 2W, tractors, easing unemployment rate, etc. Further, manufacturing and services PMIs also remained buoyant, albeit have been easing since last few months. However, urban demand and industrial activity witnessed deceleration as indicated in moderating growth in GST collections, subdued power demand and railway tonnage movement, contraction in PV and CV registration, etc.
Source: www.gstn.org.in, www.icegate.gov.in, CMIE, PIB, RBI, www.vaahan.parivahan.gov.in, www.posoco.in
^Number >50 reflects expansions and number <50 reflects contraction compared to previous month. @ - figures are preliminary data and are subject to revision. * based on CMIE survey
India’s economic indicators rebounded in October driven by festive demand, after witnessing moderation in Q2FY25. However, data suggests more mixed picture in November 2024. Going forward, uncertainty on growth outlook has increased as urban demand is likely to remain soft but is likely to be offset by better rural demand on back of robust growth kharif crop production and elevated food prices.
Central government finances in a comfortable position: Fiscal deficit widened in October on back of higher revenue spending, additional transfers to states and subdued tax collections. On a FYTD basis, fiscal deficit remained lower on YoY basis driven by robust personal tax collections and large dividend paid by RBI. Notably, corporate tax collections grew at a modest pace of ~1% mirroring subdued growth in corporate profits visible in listed companies results. Indirect tax collections growth was relatively better led by GST. On the spending side, while revenue spending has picked up in last couple of months, capex continues to remain weak. Capex is expected to rise over in H2FY25 but can still fall short of FY25BE.
Source: CMIE
While the fiscal deficit has been low, recent month data indicates that government is stepping up spending and may sustain for rest of the FY25. However, in view of high ask rate of capex spending for rest of the year and buoyant personal tax collections, deficit might undershoot the FY25 budgeted estimates (4.9% of GDP). Trade deficit widens, likely to ease from hereon: Trade deficit widened in October 2024 driven by higher oil and gold imports. NONG deficit narrowed on back of rise in exports of engineering goods, electronic product, chemicals and rice amongst others. This was partly set off by rise in imports of vegetable oil and fertilisers.
Trade deficit widens, likely to ease from hereon: Trade deficit widened in October 2024 driven by higher oil and gold imports. NONG deficit narrowed on back of rise in exports of engineering goods, electronic product, chemicals and rice amongst others. This was partly set off by rise in imports of vegetable oil and fertilisers
The trade deficit is likely to narrow as next few months are seasonally favourable for exports. Further, healthy growth in services exports is likely to keep current account within manageable range.
Source: CMIE, Ministry of Commerce; *Net Gold includes gold, silver and pearls precious & semiprecious stones adjusted for gems and jewellery exports. ^NONG refers to Non- Oil Non-Gold (as defined above) imports/exports
Retail inflation rises again, likely to ease going forward: India's CPI rose in October 2024 on back of elevated food inflation especially vegetable prices. Apart from vegetables, edible oil, pulses and cereal inflation also continue to remain high. Core CPI inched up driven by rise in gold prices while most other sub-components were largely steady relative to last month.
While CPI is expected to ease in November 2024 but is likely to stay at a relatively elevated levels due to high food inflation. However, it is likely to ease thereafter on back of arrival of new crops resulting in easing of food inflation and benign core CPI momentum.
Source: CMIE; @-CPI excluding food, fuel, transportation & housing
Commodity prices: Most major metal prices declined during the month driven by stronger USD, risk of trade war escalation and possible softening in global growth. Crude oil prices remained steady while gold prices ended lower month on month.
Source: Bloomberg; *Market prices as on November 30, 2024. ^M-o-M change. & - Change in FYTD25
Summary and Conclusion:
Divergent growth trend across economies persists with US economic activity holding up while EU and China's growth weakening. The global growth is expected to remain steady in view of expectations of US growth resilience continuing. However, in view of the incoming Republican government, downside risk to global growth has increased in view of likely increase in trade tensions, policy uncertainty, impact of antiimmigration policy, etc.
India's growth momentum has moderated driven by slowdown in urban consumption. However, this is counterbalanced by early sign of recovery visible in the rural sector. Investments remain supported by real estate sector. Going forward, we expect growth to moderate in FY25 but still remain better than rest of the major economies globally. Consumption is likely to be supported by improvement in rural income on back of robust improvement in kharif crop production while urban consumption is likely to stabilise, albeit at a lower level. Further, private corporate sector capital expenditure has potential to accelerate in view of low leverage, increasing capacity utilization, consistent corporate profitability, and a robust banking sector balance sheet. India's external sector also remains robust on the back of comfortable current account deficit and adequate forex reserves. Rise in geopolitical tensions, rise in crude prices, sharp deceleration in global economic activity, etc. are key near-term risks.
Looking ahead, the medium-term outlook for India's economy seems optimistic, in our view. This optimism is driven by policy continuity, benefits from Production-Linked Incentive schemes, opportunities arising from shift in the global supply chain, enhanced infrastructure investments, the potential of resurgence in private sector capex, and the enduring robustness of consumption.
