The domestic economy closed distinctly weak for the fiscal 2011-12 and this weak close has many wondering if the economic weakness will continue into 2012-13. The IIP (Index of Industrial Production) growth for February 2012 came in at 4.1% with the general and manufacturing index showing a negative growth month on month. The IIP growth number for January 2012 was revised downwards from 6.8% to 1.1% on the back of data error. The sharp downward revision in the IIP has increased the worries on the veracity of the IIP numbers and continued sharp revisions will prompt markets to ignore the numbers down the line.
Trade deficit widened from expected USD 160 billion to USD 180 billion for April-March 2011-12, a rise of 52% on a year on year basis. Rising cost of oil imports due to oil prices being higher by over 7% on a year on year basis pushed up overall imports by 28.5% while export growth was muted at 17.5% leading to a surge in trade deficit. The current account deficit (CAD) for the October-December 2011 period was at 4% of GDP and the CAD is expected to close 2011-12 at 3.6% of GDP against 2.6% seen in 2010-11.
Bank credit and deposit growth for fiscal 2011-12 slowed down with bank credit growth at 17% and bank deposit growth at 13.4% on a year on year basis. Credit and deposit growth have come off from respective growth levels of 21.4% and 15.8% seen in fiscal 2010-11.
Inflation as measured by the WPI (Wholesale Price Index) is the only positive note in the economy, though there are questions raised on the sustainability of lower levels of inflation. Inflation has slowed down from 9% levels of below 7% levels over the year 2011-12.
The sentiment on economic growth is not very robust going into fiscal 2012-13. The fact that the government is unleashing a large borrowing of Rs 370,000 for the first half of fiscal 2012-13 against Rs 250,000 crores seen in the first half of 2010-11 has the markets worried on interest rates. Falling demand for government bonds by banks on the back of falling deposit growth will push up interest rates in the economy. The government borrowing could even negate rate cuts by the RBI.
Economic sentiments can improve if there is positive response to rate cuts by the RBI, monsoons are on track and global economy shows signs of uptick. Markets tend to front run economic growth and if there is a rally in financial markets for whatever reasons, there is a hope for improving economic conditions.
US and Germany stand out in the crowd
The economies of US and Germany are looking much better than the economies of their peers, including China. US first quarter GDP forecasts for 2012 is being revised upwards by economist on the back of higher retail sales and higher inventory build up in February 2012. Retail sales rose 1.2% against expectations of 0.7% in February while inventories rose 0.9%. The weak job numbers of 120,000 jobs added in March 2012 against 240,000 jobs added in February 2012 does not negate the solid 1.3 million jobs added over the last seven months. Unemployment rate is down to 8.2% in March from 8.3% in February.
Germany’s economy is expected to do well this year as low unemployment and rising wages prompt consumer spending. Germany’s unemployment rate is at twenty year lows leading to rising wages as an improving economy looks to add jobs in a tight labour market. Germany is seeing property prices moving up on the back of job stability and higher wages. A weak Euro that is down by around 7% year on year is helping Germany’s exports.
China’s inflation for March came in at 3.6% against forecasts of 3.4% and against February’s inflation of 3.2%. Higher inflation can dent China’s growth if the central bank does not ease up on policy. China’s growth forecast has been revised downwards to 8.2% from original estimates of 8.4% due to slowing exports.