India: Strong PMI data in June is underpinned by healthy demand
July 4, 2018
The composite Purchasing Manager’s Index (PMI), produced by Nikkei and IHS Market, rose to 53.3 in June from 50.4 in May. This represents the best reading since October 2016 and means that the index climbed further above the 50-point threshold that separates expansion from contraction in the private sector.
The manufacturing PMI leapt to 53.1 in June from 51.2 in May. Therefore, the index remained above the 50-point threshold that separates expansion from contraction in the manufacturing sector in June, where it has been since August 2017. Conditions in the manufacturing sector improved in June as output increased for the 11th consecutive month—recording the fastest rate of growth since December—thanks to broad-based demand and a rise in new domestic and export orders. Against this background, firms continued to raise employment at a robust pace. After a small decline in May, businesses increased purchasing activity to keep up with the rising output, which also put upward pressure on post-production inventories in June. On the price front, input costs faced by businesses rose, extending the period of inflation to 33 consecutive months. Higher prices for steel and fuel were partly behind the inflationary pressure in June. In response to higher input prices, firms raised output prices in June. Looking ahead, businesses are optimistic for output levels over the next 12 months.
The Nikkei services PMI returned to expansionary territory in June, increasing to 52.6 from 49.6 in May. The rate of growth in June was the highest in 12 months and was boosted by increased inflows of new work. Moreover, reflecting better demand conditions, employment levels ticked up. Job creation was most notable in the information and communications technology sector. Outstanding business for service providers increased for the 25th consecutive month in June, while the rate of accumulation accelerated from May. Although this can be considered a positive indicator for business conditions, higher backlogs of work in June were also affected by delayed payments. On the price front, input and output inflation remained persistent in June. Looking ahead, business sentiment in the services sector regarding the coming 12-month period remained optimistic in June.
Commenting on both PMI developments in June, Aashna Dodhia, Economist at IHS Markit, said:
“The PMI data [signaled] the best improvement in the overall health of the economy since October 2016, propelled by solid growth in both the manufacturing and service economies, with the sharper rise in the former. However, overall input costs rose at the strongest rate since July 2014, and amid a weak rupee and higher oil prices, inflation may remain elevated. Given these circumstances, the chances of further monetary policy tightening have heightened.”
Author: Edward Gardner, Economist