The IIP (Index of Industrial Production) growth data for September 2012 and the provisional trade data for October 2012 were released on the same day in November the 12th of November. The data came in weak and spoilt Diwali celebrations for the market with the Sensex and Nifty closing down in token Diwali day trading on the 13th of November. However the inflation data released on the 14th of November has given some solace to the markets as negative IIP growth and falling inflation rate is positive for rate cut expectations. RBI may well cut rates in December 2012 rather than January 2013. RBI had guided markets for rate cuts in January 2013 in its 30th October 2012 monetary policy review.
The IIP growth for September 2012 was a negative 0.4% on a year on year basis with manufacturing growth at a negative 1.5%. IIP and manufacturing growth for September 2012 was a negative 0.9% and 0.7% respectively on a month on month basis. The April-September 2012 IIP growth was at 0.1% against a growth of 5.1% seen in the same period last year. Manufacturing growth in the April-September 2012 period was at -0.5% against 5.5% seen last year. IIP growth trends reflect weakening demand in the economy and also reflect weak export growth due to sluggish trends in the global economy.
Trade data for October 2012 showed export growth at a negative 1.6% on a year on year basis. April-October 2012 export growth is a negative 6.2%. The fall in export growth reflects the poor global trade conditions due to economic woes in most parts of the world. Imports for October 2012 rose 7.4% on a year on year basis led by oil import growth of 31.6%. Trade deficit for October 2012 stood at USD 21 billion, the highest level fiscal year to data. The rising trade deficit will pressure the CAD (Current Account Deficit), which at 3.9% of GDP for the first quarter of 2012-13 is at higher levels. Rising current account deficit places pressure on the Indian Rupee, which has fallen by 4% from highs over the last couple of months.
Inflation as measured by the WPI (Wholesale Price Index) came in at 7.45% for the month of October 2012, down for September 2012 levels of 7.81%. The fall in inflation is positive for markets as rate cut expectations improve. The lower inflation numbers negates part of the weak market sentiments on poor IIP and trade data.
Gross direct tax collection grew by 6.6% in the April-October 2012 period with corporate tax growth at just 2%. Tax collections are weak forcing the government to increase full year 2012-13 borrowing by Rs 20,000 crores. Passenger car sales grew 23% in October 2012 on the back of festive season demand. However overall vehicle sales was 9% lower in October as demand for two wheelers and commercial vehicles were muted.
“Fiscal Cliff”, China leadership change, Japan recession and Eurozone issues
US is trying hard to stave off the “Fiscal Cliff” that could potentially bring down the economy by 3.5%. The US is facing spending cuts and tax increases from January 2013 and the reelected president, Barack Obama, will have to put off the tax increases and spending cuts in order to keep the economy from going under. The US Federal Reserve (Fed) has commenced its QE3 (Quantative Easing) program and is buying USD 40 billion of MBS (mortgage backed securities) a month. The US economy added 177,000 jobs in October 2012 against a revised 148,000 job additions in September 2012. US unemployment rate rose to 7.9% in October from 7.8% levels seen in September. US economy is seeing stability and if the “Fiscal Cliff” issue is sorted out the economy will gain in strength going forward.
China is changing its leadership of the government in November 2012. The new leader is likely to focus on reforms to spur domestic consumption. China’s inflation for October 2012 came in at 1.7% a three year low. Inflation printing lower is good for China as its central bank can ease monetary policy to stabilize growth expectations. China’s third quarter GDP growth at 7.4% is the lowest in three years.
Eurozone will see recession in 2012 and is expected to grow by just 0.1% in 2013 as per the latest European Commission forecasts. Unemployment rate at record highs of 11.6% is expected to start trending down from 2014. Eurozone economy is hit by debt crisis in many of its countries including Spain, Portugal, Italy and Greece as these economies face steep spending cuts to reduce deficits.
Japan’s GDP growth fell 0.9% in the third quarter of 2012, the first contraction in three quarters. Japan is facing weak export growth on the back of a strong Yen. The Yen is just off by 6% from record highs against the USD. Japan is now expected to go into recession in the coming quarters.