The continued slowdown in global manufacturing activity in June 2023 (at a six-month low of 48.8) and the drop business optimism index to a seven-month low have reignited fears of a global growth slowdown, said the Bank of Baroda in a report on Tuesday.
The report stated that activity in China is losing momentum (PMIs, industrial production, retail sales), which is impacting Europe the most. In the case of the US, there are mixed signals.
“While manufacturing activity and consumer spending is getting impacted, the real estate sector is seeing some revival and the labour market still remains relatively tight,” as per the report.
The BoB report mentioned that more cues on Fed’s future rate action are awaited from the release of Fed minutes later this week. On the domestic front, after a delayed start, the South-West monsoon has picked up pace and registered below normal rainfall at only 13 per cent (below LPA) till 29 Jun 2023.
This has resulted in the overall improvement in sown area (+0.4 per cent YoY as of 30th Jun). Notably, the Reserve Bank of India (RBI) in its June 2023 policy kept the rates on hold as inflation has begun to come down.
“Our in-house BoB ECI index is showing that CPI will settle between 4 to 4.3 per cent in June 2023. We expect RBI to cut rates only in Q4FY24,” it stated.
Growth engines across regions seem to be losing steam with manufacturing activity faltering. A significant decline is noted in Europe and US.
In the case of Europe, both UK and Germany are facing headwinds as elevated prices are denting consumer demand and the slowdown in China is hurting the export of goods.
“Germany’s LFO business sentiment signals that GDP might contract in Q2,” according to the BoB report.
In China, following the partial recovery made at the beginning of the year (supported by pent-up demand and Lunar New Year celebrations), now weakness in activity has returned.
“While manufacturing activity is contracting (official PMI), non-manufacturing PMI has come down in Jun’23. More government is widely expected to stimulate growth,” it mentioned.
Notably, India’s current account deficit (CAD) increased to USD 67.1 billion in FY23 from USD 38.7 billion in FY22.
This translates into a CAD of minus two per cent of gross domestic product (GDP) in FY23 versus -1.2 per cent of GDP in FY22. The trade deficit increased to a record high of USD 265.3 billion in FY23 (7.8 per cent of GDP) from USD 189.5 billion in FY22 (six per cent of GDP).
On the fiscal front, the centre’s fiscal position in FYTD24 (April to May 2023) seems to be on track with its net revenue rising by 15.7 per cent, following a -13.9 per cent decline in April 2023.
The pace of contraction in direct tax collections has slowed, while that of indirect tax collections has improved. “Overall expenditure of the government is however off to a slow start, mainly on account of a dip in revenue spending, while capex on the other hand picked up pace,” it added.
