Poor PMI due to macro uncertainty; but CAD to narrow: HSBC

Leif Eskesen of HSBC Global Research feels that the current PMI (Purchasing Mangers’ Index) data was low due to higher macroeconomic uncertainty. However, he is optimistic on a gradual reduction in the current account deficit (CAD) going forward. The CAD has seen its worst in this quarter and will narrow subsequently, he tells CNBC-TV18 in an interview. He is confident that the government will be able to achieve the CAD target of USD 70 billion. 

Also read: Can't cap fiscal deficit at 4.8%; polls to up costs: ICRIER Below is the edited transcript of his interview to CNBC-TV18. Q: Give us a word on the purchasing managers’ index (PMI) data which has come in for September. What would you make of growth as we saw the core sector growth at a seven month high, but the PMI is still in contraction mode? How would you read it? A: It still is. You saw it below 50-mark again in September albeit to the less extent than what we saw in August basically. But, overall, we are still looking at a contraction. If you look at the average reading for the PMI manufacturing during the July-September quarter, it is certainly below what we saw in Q1 of the fiscal. It points to a weakening in the sequential growth momentum in that Q2 of the fiscal year. Over the summer we saw a tightening in financial conditions. Some of that was brought about of course by liquidity tightening measures by the Reserve Bank of India (RBI) and capital outflows during that quarter. So that is one of the reasons for this slowdown in activity in growth. In addition to that, there is higher macroeconomic uncertainty at the moment because of the balance of payment (BoP) challenge that India has been facing more recently. It has caused more uncertainty amongst businesses and consumers and has made them more cautious about the spending. It is actually continuing to weigh on growth for the time being. Q: Where do you stand in terms of your estimates on current account deficit (CAD)? A: It is a better start to the fiscal year than expected. This is probably the worst we are going to get for this fiscal year. The CAD would narrow in the subsequent quarters. We have already seen that over the summer, in terms of the trade deficit numbers responding to the weaker currency. The trade deficit is narrowing and they remain contained in coming months for the same reasons. Potentially, we could get a little bit of an uptick in import bill as we head into that festive season. We could also potentially see maybe more imports of coal to meet some other electricity production demands that you have in the economy. But overall, in light of what you talked about earlier, the government’s official estimate of around USD 70 billion for the fiscal year is within reach. We still are a little bit more conservative than that but not much. Q: The bigger concern at the moment appears to be the US shutdown and the potential of this debt ceiling also being breached on October 17. What is the sense in terms of flows, asset markets and asset allocation because of these jitters? Tapering gets postponed, so should we have a positive spin that emerging market flows will not be disrupted because economic data, US economy could be a little weaker than estimated? A: You need to first determine how long is this shutdown going to last. If you are just talking about a couple of days, I don’t think it will make much disruption to the US economy, to flows between emerging markets and advanced economies. The longer this shutdown is going to last, the more you are going to have an impact on the US economy both through the direct impact that is going to have on growth from lower government spending and it would start to build up higher anxiety amongst businesses and consumers. One of the more concerning outcome should be if this shutdown lasts up until the time where the government runs out of money and will be close to the Fed debt ceiling. The debt ceiling being met if that starts to happen, we could see a rerun of what we saw back in the summer of 2011 where global risk aversion pushes up and that is not positive for emerging market flows.