What explains slowing of manufacturing PMI?

The slowdown in HSBC India Manufacturing Purchasing Manufacturer’s Index (PMI) in December came as a surprise, especially when all other economic indicators showed robust growth. While underpinning the fact that the PMI still indicates healthy momentum in the manufacturing sector, economists note that it may be an indication of the expected moderation in economic activities in the fourth quarter of the fiscal as well as over the next fiscal year 2024-25.  

The HSBC India Manufacturing PMI fell to an 18-month low of 54.9 in December from 56 in November. While it was indicative of a marked improvement in the health of the manufacturing sector, the latest reading was above the long-run series trend, but contributed to the lowest quarterly average of 55.5 since Q1FY23. 

The fall in manufacturing PMI was due to several factors including lower output and “fading demand for certain types of products” as well as slower growth in export orders. 

In contrast, the HSBC India Services PMI rose to a three-month high of 59 in December from a one-year low of 56.9 in November. Owing to lower readings in October and November, however, the latest quarterly average was the lowest since Q4FY23. 

“Combining the Services PMI Index with the Manufacturing PMI index, which was released earlier in the week, provides a composite picture of the state of the economy. Overall output, new orders and future expectations rose. The overall rise in input prices softened, but that of output prices rose, leading to better margins,” said HSBC’s Pranjul Bhandari, Chief Economist, India and Indonesia, and Aayushi Chaudhary, Economist, India, Indonesia & Sri Lanka, in a note.  

A reading above 50 indicates expansion in economic activity while one less than 50 indicates contraction. 

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Suman Chowdhury, Chief Economist and Head–Research, Acuité Ratings & Research, said that the PMI Composite improved to 58.5 in December 2023 from 57.4 in November 2023 driven by the higher PMI services print. “On a quarterly basis, the moderation in the growth of economic activity is evident from the average PMI Composite, which slipped to 58.1 in the third quarter of the fiscal from 61.3 in the second quarter and 60.9 in the first quarter.”  

According to the first advance estimate of national income, GDP growth is forecast at 7.3% this fiscal. Economic growth in the second half of the fiscal is likely to 7% in the second half of the fiscal from 7.7% in the first half. Most analysts believe there are downside risks to this number due to approaching elections that could slow down capex growth as well as concerns over farm sector output. 

Collections from the goods and services tax remained buoyant but fell to a three month low of Rs 1.64 lakh crore in December 2023 although other high frequency indicators have remained robust despite the festive season coming to an end. Flailing rural demand has also remained a concern for economists despite expectations of high GDP growth. 

Acuité has revised its FY24 GDP growth forecast to 6.8% with minor upside. For FY25, it believes growth may slow further to 6-6.3% but it has not made any official projections. 

Rahul Bajoria, MD and Head of EM Asia (ex-China) Economics, Barclays in a recent note pointed out that the manufacturing and services PMI remain at elevated in levels, indicating continued optimism. Firms surveyed by S&P Global expect demand momentum to extend into 2024, as per the press release, he said.  

“We revised our GDP growth forecast FY23-24 to 6.7% from 6.3% following the the second quarter FY24 GDP release, but see further upside risks given continuing momentum in domestic activity,” he further said. It is to be noted that the National Statistical Office does not use PMI data for the national income accounts although the Reserve Bank of India and the finance ministry use it as a high frequency indicator to assess economic activity on the ground.   

HSBC said it has forecast GDP to grow by 6% year on year in FY25, versus 6.9% in FY24. Much of this fall is likely to be led by statistical reasons, for instance normalising deflators and base effects. As such, actual growth on the ground may not soften by as much.   

“Falling oil prices and the structural rise in credit growth have been supportive of India's GDP growth, while weak agricultural output has been a drag, Bhandari and Chaudhary further said, adding that where these variables land will likely determine the shape and size of the economy over the next year.  

Globally, too, the PMI remains weak indicating continued challenges for the world economy amidst geopolitical tensions. The global manufacturing PMI for December 2023 at 49 is pointing to a sustained stagnation in manufacturing activity owing to the weakness in advanced economies, said a note by India Ratings and Research. Even the global PMI for services for December 2023 showed only a marginal expansion of 50.6 compared to the stronger expansion in 1H23.   

“In addition, advanced economies are witnessing rising unemployment which is close to the levels recorded in 2010, in the aftermath of global financial crisis (barring the COVID-19 period). Overall, the recent data suggests weak global growth momentum,” it said.