India’s record GDP growth may open the door for aggressive central bank (RBI) policy rate hikes to prevent the currency (INR) from depreciating and inflation from rising further. However, we believe INR’s troubles are far from over and maintain our view that the currency weakens to the 71.5 level against the USD by end-2018
Conventional wisdom falls apart when an economy with many difficulties – persistently high inflation, lingering adverse effects of twin shocks of cash bans and consumption tax, widening twin-deficits (trade and fiscal), ongoing banking troubles and a battered currency – grows at such an astounding pace.
Contrary to the consensus of a slowdown, India’s GDP growth accelerated to 8.2% year-on-year in 1QFY19 from 7.7% in the previous quarter. This is the fastest rate in more than two years and probably the fastest rate in the world currently. The outcome was far better than the consensus centred on a 7.6% figure, and our 7.0% estimate.
Private consumption was the main driver with an improved contribution of 4.7 percentage points of total GDP growth (up from 3.7ppt in the previous quarter, see figure below). This is the highest contribution since 4QFY17 when de-monetisation hit consumers hard and was at odds with persistently high inflation and complicated consumption tax reforms. The firmer private consumption more than offset the slowdown in government consumption and fixed capital formation. Net exports remained a drag on GDP growth for the fifth straight quarter, though smaller than before. On the industry side, manufacturing powered the GDP.
On the statistical factors, we can give some credit to the low base-year effect in boosting the year-on-year growth; the late-2016 de-monetisation depressed GDP growth to a four-year low of 5.6% in the year-ago quarter. However, the high base-year effect will be at work to depress GDP growth in the remainder of the year. We forecast full-year FY19 growth of 7.2%, below the central bank’s (RBI) 7.4% and the government’s 7.5% forecasts.
The higher than consensus official manufacturing PMI implies that the government's push for infrastructure investment has come into effect.
China's manufacturing and non-manufacturing PMIs both beat consensus.
The Manufacturing PMI rose to 51.3 from the previous' 51.2. The main reason behind this better outlook is the government's push for fiscal stimulus on infrastructure projects that boost production activity and have pushed up raw material prices.
Non-manufacturing activity was pushed up by tourism, reflected in air transportation, and banking activity, which is a result of more relaxed asset management policies.
We expect even faster PMIs in the coming few months.
Fiscal stimulus and monetary easing will facilitate faster production activity from infrastructure investment projects and their financing. We expect new orders will continue to stay above 52.0, and new export orders continue to lie below 50 due to the trade war.
Real estate activity could offset some of this growth, as more cities tighten purchase and mortgage policies. Having said that, we do not expect the housing market to derail the whole economy. Tightening measures on housing will be flexible, not aggressive.
As a result, GDP growth in 3Q18 will still hold up. We are forecasting 6.5%YoY and 6.3%YoY in 3Q and 4Q, respectively from 6.75% in 1H18. Depending on the speed of fiscal stimulus and its scale to offset the looming tariffs on up to $200 billion of Chinese exports, GDP growth in 4Q18 could surprise on the upside.
Yuan weakening would continue as trade tensions escalate again. We retain our forecast of USDCNY at 7.0 by end of 2018.
Its been a good start to the day in Asia, where both Japanese capital spending for 2Q18 and corporate profits are adding to the consumer strength lent by rising wages and promising a better 2Q18 GDP figure than we had been penciling in