Global PMI at 3-year low, US growth could halve
Two months ago, the IMF was talking of a global recovery—global growth was projected to rise from 3.5% in 2012 to 4.1% in 2013—and the US was at the forefront, with growth rising from 2.1% in 2012 to 2.4% in 2013. On Tuesday, after its Article IV cosultations, while lowering the 2013 projection to 2% the IMF was speaking of a possible 1% growth in 2013, or the stall-speed level at which pace a recession is always a possibility. What happened to the famed US recovery, led by a savvy government that unleashed a flood of liquidity and gave unconditional support to banks in stark contrast to Europe which has yet to come up with an unstinting spending plan?
On Monday, the Markit Purchasing Managers’ Index for the world fell to its lowest in three years—from 50.6 in May to 48.9 in June—signalling not just a slowdown but a contraction. US manufacturing PMI fell from 54 in May to 52.5 in June. To be sure, there were some positives as the ‘new employment’ sub-index still remained marginally positive, but the biggest fall—from 50.5 in May to 48.3 in June—came in new export orders. And, as Morgan Stanley Asia’s former chairman Stephen Roach pointed out (http://goo.gl/sCK2x), over 41% of US growth since the first quarter of 2009 has come from exports-growth based on European and Chinese demand. In Europe, PMI fell to 45.1, the weakest in three years, and China’s PMI fell for the eighth consecutive month to, you guessed it, the worst quarterly level since the first quarter of 2009—our Reflect columnist Sunil Kewalramani argues a Chinese hard landing today. Which is why the IMF hopes US politicians will get their act together and agree on spending plans since, according to the current law, the fiscal deficit needs to be cut by 4 percentage of GDP—the sharp ‘fiscal cliff’, the IMF argues, will see US growth fall to 1% in 2013 and going into negative territory after that. Europe remains touch and go even after last week’s breakthrough summit.
In such a situation, India looks more vulnerable. Exports, more responsive to global growth than to exchange rates, will continue to take a beating and, given the high exposure of European banks to India, forex reserves remain at risk—low global oil prices are a boon but if, as some point out, that lowers FII and other inflows, it’s a mixed blessing. In such a situation, the government is already talking of raising expenditure—citing global precedents! Problem is, with the expenditure more directed towards consumption, it will only worsen inflationary potential. The government needs to focus on attracting investment. The current problem over the reserve price of telecom and over whether intra-circle 3G roaming is illegal (http://goo.gl/5OcVB), however, shows the government is far from getting its act together.