After a rapid rebound in covid, recovery slowed in July
The tracker turned a little greener – as green as before wave two – but the red flags remained. As in June, nine of the 16 high-frequency indicators taken into account in the tracker were in the red, or below their five-year trend, with household stress still acute. Six were in the green, or above the five-year trend, while one was in line with it.
Launched in October 2018, Mint’s Macro Tracking provides a comprehensive report on the state of the economy based on trends in 16 high-frequency indicators in four segments: consumer economy, production economy, foreign sector, and comfort of living. . The tracker hit its lowest levels during the blockages of April 2020 (13 indicators in red) and May 2021 (12 in red).
July readings show that the economy, despite making rapid gains, still has some way to go. Activity, as measured by the Composite Purchasing Managers Index (PMI), remained a sore point in July despite rising mobility and market confidence. Retail price inflation slowed but was on the rise, although employment and wage data were subdued.
High-frequency data for August available so far suggests an acceleration in momentum since July. Nomura’s business resumption index, which uses data on mobility, electricity demand and labor, is now above pre-pandemic levels. But a clearer picture will only emerge next month, when data from a wider set of indicators becomes available.
The recovery in the coming months will be driven by demand for the festival season, overdue payments from government staff, the pace of vaccinations and easy financial conditions, Nomura economists said in an Aug. 23 note to clients. .
The consumer economy segment experienced a remarkable recovery: for the first time since March 2019, two of its four indicators were green. This was led by tractor sales, a barometer of rural demand that has been the fastest to rebound from closures since last year.
Passenger vehicle shipments to showrooms recorded their first growth in nearly three years, increasing 5% on an annualized basis over the two-year period. But vehicle registrations, which are more closely tied to retail sales, were still below pre-wave levels and fell 7%.
The tracker now considers annualized growth over the past two years to compare current activity levels with the pre-pandemic period and to avoid base effect distortions in year-over-year comparisons.
Even when the pandemic subsided, Indians remained cautious about air travel. Domestic airlines carried 5 million passengers in July, a sequential jump of 61% but still lower than in April. Compared to the same month two years ago, the difference was 35% on an annualized basis in July.
The third consecutive contraction in the composite PMI index was led by the contact-intensive services sector, which is struggling to recover amid high input costs and subdued demand. Falling new orders and weak employment in the sector also kept businesses pessimistic. However, the manufacturing sector came out of a brief contraction to post good growth in July.
The external sector benefited from improving business momentum, with three indicators in the segment above their five-year trend. Helped by the resumption of global growth and a weak month for the rupee, Indian exports hit a record $ 35.4 billion in July, up 16% over two years. Both exports and imports were somewhat boosted by higher crude oil prices. Exports in labor-intensive sectors have also shown growth – only the second time since October 2019, indicating that parts of the labor market may recover. The rupee’s decline (1.3%) was in line with trends in other emerging markets (EM), which were facing uncertainty about the policy actions of the US Federal Reserve.
The comfort of life segment is all red for the fourth consecutive month. Annual retail sales inflation has eased but has exceeded 6% compared to a two-year period. Food prices have fallen due to government measures on the supply side, but fuel prices have been a pain point. Core inflation, which excludes food and fuel, has fallen only slightly.
Little relief is likely so far as input prices remain high and demand picks up. At its August meeting, the Reserve Bank of India’s rate setting committee raised its short-term inflation expectations, indicating that the problem will persist and policymakers will tolerate it to support economic growth. However, dissent is mounting within the committee, as one member warned of persistent inflation if the easy money policy sticks around for long.
At the same time, rural wages fell by 1.2% in real terms over the period of two years ago, which could keep incomes and consumption under pressure. The labor force participation rate, as measured in a survey by the Center for Monitoring Indian Economy, has remained at a modest 40%.
The vaccination campaign and India’s ability to contain a third wave will determine the sustainability of the ongoing recovery. But the improvement in the vaccination rate has been very slow and India is far from its goal of vaccinating all adults by December.
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