A monthly digest of key macroeconomic events (Edition: Sep 2024)

“There have been three great inventions since the beginning of time: fire, the wheel, and central banking.” - Will Rogers

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Executive Summary

The much anticipated and telegraphed US Fed rate cut finally took place in September. However, the Fed surprised most economists by delivering a larger 50 basis points (bps) cut than the median forecast of 25 bps, calling it an “appropriate recalibration” of the monetary policy stance. The post-meeting press conference saw Chair Powell emphasizing that the upside risk to inflation has diminished, while the downside risk to employment has increased. While noting that economic growth is still robust, Powell outlined the support to the labour market as the basis for a larger upfront cut. The Fed dot plot indicated another 50-bps cut this year and another 100-bps next year, however, the markets have priced in much higher cuts by the first half of 2025. Elsewhere, the European Central Bank reduced rates while England and Japanese central banks kept it on hold. China saw significant stimulus, in a boost to risk assets, with a sharp rally in currency and local equity markets. Geo-political tensions, particularly in Middle East is the key risk to watch out for, as any sharp upshoot in commodity prices will have a negative effect on inflation prints.

On the domestic front, RBI’s Monetary Policy Committee (MPC) begins this week, where we expect status quo on rates. We believe RBI will lag the Fed both in terms of timing and magnitude, as it is expected to be a shallow rate cut cycle, with domestic data prints supporting the stance. On the data front, CPI remained below 4% for another month (base effect in play with reversal expected in the next quarter). India’s current account deficit in Q1FY25 widened to 1.1%, led by a widening of merchandise trade deficit, while the capital account surplus moderated to US$14.4bn, on account of a slowdown in foreign portfolio inflows. Overall, the balance of payments (BoP) surplus eased to US$5.2bn vs US$30.8bn in the previous quarter. On government finance, the fiscal deficit for April-August 2024 was 27% of the budgeted deficit with a weaker pace of capital expenditure, thereby increasing the chances of a lower than budgeted fiscal deficit, as receipts hold up.

Domestic Updates

India's retail inflation still within RBI band, wholesale inflation eases further

The retail inflation in India, which is measured as a change in the Consumer Price Index (CPI) moves slightly upwards to 3.65% YoY in August from 3.54% YoY in July and 6.83% in August 2023. It’s the second time in nearly 5 years that retail inflation came in below the RBI’s medium-term target of 4%. The food inflation, which accounts for nearly half of the overall basket, rose to 5.66% in August from 5.42% in July 2024. Vegetable inflation increased to 10.71% in August from 6.83% in July due to uneven rainfall that impacted crop yields.

Inflation based on the wholesale price index (WPI) eased further to 1.31% YoY in August 2024 from 2.04% YoY in July due to deceleration in food inflation and deflation in fuel prices. Food inflation came down to 3.26% from 3.55% in July while fuel and power recorded a deflation of 0.67% compared with a 1.72% rise in July.

Meanwhile, retail inflation for farm and rural workers softened to 5.96% YoY and 6.08% in August 2024, respectively, from 6.17% YoY and 6.20% in the previous month.

India’s industrial output growth turns around

The growth in India’s industrial output, as measured by the Index of Industrial Production (IIP), improved to 4.8% in July from 4.2% in June as manufacturing activity as well as investments started gaining traction post-elections. The growth in the manufacturing sector (the largest in the IIP basket) accelerated to 4.6% YoY in July 2024 from a 7-month low of 3.2% in June 2024. However, the acceleration is somewhat offset by deceleration in mining (3.7%) and electricity (7.9%), which are 5-month and 4-month lows, respectively.

World Bank, ADB projects India’s FY25 GDP growth at 7%

World Bank has revised India’s real GDP growth forecast for FY25 from 6.6% to 7% despite subdued global growth. Due to strong revenue growth and continued fiscal consolidation, the international financial institution projected India’s debt-to-GDP ratio to decline from 83.9% in FY24 to 82% by FY27. However, it noted that India needs to diversify its export basket and leverage global value chains to reach the goal of US$1 trillion in merchandise exports by 2030.

On the other hand, the Asian Development Bank maintained India’s GDP growth at 7% for FY25 and 7.2% for FY26. ADB Country Director for India Mio Oka said, “India’s economy has shown remarkable resilience in the face of global geopolitical challenges and is poised for steady growth. Agricultural improvements will enhance rural spending, which will complement the effects of robust performance of the industry and services sectors.” Owing to fiscal consolidation, it expects India’s government debt to decline from 58.2% of GDP in FY24 to 56.8% in FY25. The general government deficit, which includes state governments, is expected to reduce below 8% of GDP in FY25.

SEBI launches FPI-dedicated cell

The Securities and Exchange Board of India (SEBI) established a dedicated foreign portfolio investor (FPI) outreach cell to assist FPIs looking to enter in the Indian markets. The cell will facilitate a bridge between FPIs and the Indian securities market by providing them guidance and support throughout their engagement, from pre-application to post-registration. As per SEBI, about INR 3.4 lakh crore of foreign portfolio investor inflows were recorded during FY24, of which, INR 2.08 lakh crore were invested in equities and INR 1.2 lakh crore in the debt market. This underlined the importance of creating a framework for foreign investors.

Loan growth of rated finance companies expects to moderate

S&P Global Ratings stated that loan growth of rated finance companies in India may decline from 20% in FY24 to 18% in FY25 due to the cumulative impact of RBI actions. The rating agency commented that “recent actions by RBI will curtail lenders’ over-exuberance, enhance compliance, and safeguard customers”.

Loan growth to MSME improves in current fiscal - RBI

As per a recent RBI report, loans to micro and small enterprises grew 13.3% YoY and medium enterprises rose 17.2% so far in the current fiscal year. This is higher than the growth registered for both the segments in FY24 due to several factors including renewed focus on MSME, deepening of the Account Aggregator framework, etc. The launch of the RBI’s end-to-end digital platform, Unified Lending Interface (ULI), which is expected to revolutionise access to credit, is expected to provide further impetus to growth. In FY24, the loan growth of micro-small and medium enterprises was recorded at 10.2% and 9.7%, respectively, compared with 28.3% and 36.8% in FY23.

FDI in equity jumps nearly 50% in 1Q FY25

Foreign direct investments (FDI) equity inflows in India rose steeply by 47.8% to US$16.2 billion in April-June 2024 driven by services, computer, telecom, and pharma. The major countries contributing to equity inflows include Mauritius, Singapore, the US, the Netherlands, the UAE, the Cayman Islands, and Cyprus. Total FDI, including equity inflows, reinvested earnings, and other capital, rose 28% to US$22.5 billion in the same period. The growth in FDI is expected to accelerate further due to the potential impact of the US Federal Reserve interest rate cut and favourable economic conditions in India.

India’s trade deficit expands further

India's merchandise trade deficit expanded further to US$29.7 billion in August 2024, which is the highest in 10 months, from US$23.5 billion in July 2024 and US$21 billion in June 2024. Rising shipping costs and slowdown in China are adversely affecting India’s exports, which declined 9.3% YoY to US$34.7 billion in August. Imports rose 3.3% YoY to US$64.4 billion, which is the highest since October 2023.

Unemployment rate worsens

The unemployment rate in India worsened to 8.5% in August from 7.9% in July, according to the survey by the Centre for Monitoring Indian Economy (CMIE). However, the month witnessed a large portion of working-age population actively looking for jobs as depicted by the sharp rise in labour participation rate. As per CMIE, the unemployment rate rose as some left the job market due to a lack of opportunities.

Sales of passenger vehicles skid for the second month

Total passenger vehicle sales in India slid 1.8% YoY to 352,921 units in August, after falling 1.9% in July, as per data from the Society of Indian Automobile Manufacturers (SIAM) revealed. The fall can be attributed to customers postponing their purchases for the festive season. According to data from the Federation of Automobile Dealers Association (FADA), which shows actual retail sales from showrooms, versus the SIAM, which puts out dispatches to dealers from auto factories, passenger vehicle sales fell 4.5% YoY in August. ?Sales of 2-wheelers recorded a 6.3% rise while sales of tractors and commercial vehicles declined 11% and 6% YoY, respectively, during the month.

Global Update Roundups

Monetary policies

The US Federal Reserve, in a historic move, cut its benchmark interest rate by 50 bps the first time since 2020. The federal funds rate now stands at 4.75%-5%, down from the 22-year high target range of 5.25%-5.5%. The rate cut followed a spate of 11 rate hikes since March 2022 (including four in 2023) to combat inflation. The policymakers indicated more rate cuts are likely by the end of this year. As per the median of new economic projections published at the end of the policy meeting, interest rates could be lowered to a range of 4.25%-4.5% by 2024-end as inflation nears the 2% goal and unemployment spikes. This implies that an additional 50 bps cut might take place this year.

The Bank of Canada trimmed its benchmark interest rate by 25 bps to 4.25% for the 3rd consecutive time in its September meeting, after keeping the rate at a two-decade high of 5% for a year until June this year. The cut was executed with the intent to boost the economy and consider continued easing in inflationary pressures. In August, consumer inflation in Canada softened to 2% (the lowest level since February 2021) from a 40-month low of 2.5% in July, thereby reaching the central bank's target.

GDP growth

US: The growth in real GDP came in at an annualized rate of 3% in Q2 (Apr-Jun) of calendar year 2024 (CY24), up from the sluggish growth of 1.6% (revised) in Q1CY24. The growth is driven by resilience in consumer spending (which accounts for about 70% of domestic economic activity) and business investment. Consumer spending grew 2.9% at an annual rate while business investment rose 7.5%, led by a 10.8% increase in investment in equipment.

Japan: The economy grew at an annualized rate of 3.1% in Q2CY24, which is higher than the average estimate of a 2.3% rise and degrowth of 2.3% in the first quarter of the year. The recovery in growth is attributed to higher consumption of automobiles and other durable goods.

Unemployment

US: The unemployment rate eased to 4.1% in September, the lowest in three months, from 4.2% in August, exceeding market expectations of an unchanged rate. This happened as the number of unemployed individuals declined by 281,000 to 6.8 million, while employment levels rose by 430,000 to 161.8 million. The labour force participation rate was steady at 62.7% in the month.

UK: The unemployment rate declined to 4.1% from May to July 2024 from 4.2% for three months till June, meeting market expectations. The unemployment rate is the lowest for three months ending January this year as the number of unemployed individuals decreased by 74,000 to 1.44 million. On the other hand, the number of employed individuals rose by 265,000, the highest increase in over a year and a half, reaching 33.2 million, led by a rise in full-time employment.

Canada: The labour market continues to soften as the unemployment rate rose further to 6.6% in August from the 30-month high of 6.4% in July and exceeded market expectations of 6.5%. The number of unemployed increased by 60,400 from the prior month to ~1.5 million due to a rise in unemployment for the core working age (to 5.7%) and the older population (to 5.5%).

Inflation readings

US: Consumer price inflation decelerated for a 5th consecutive month to 2.5% in July, the lowest reading since February 2021, from 2.9% in July. The reading is below the consensus estimate of 2.6%. This happened as energy costs fell (-4% vs 1.1% in July) and the inflation for food (2.1% vs 2.2%) and transportation (7.9% vs 8.8%) softened during the month.

Eurozone: The annual inflation rate in the Eurozone declined to 1.8% in September, the lowest since April 2021, compared to 2.2% in August, but came in below the consensus estimates of 1.9%. However, it is below the 2% target set by the European Central Bank. This happened as energy prices fell (-6% vs -3%) and inflation for services decelerated (4% vs 4.1%).

UK: The annual inflation rate remained unchanged at 2.2% in August compared to July after remaining steady at 2% for consecutive two months earlier, which is also the central bank target. It came in line with the consensus estimates. The upward pressure on inflation mostly came from air fares, recreation and culture, and transport. On the other hand, the downward pressure mostly came from motor fuels, and restaurants and hotels.

China: The annual inflation rate rose to 0.6% YoY in August from 0.5% in July, coming below the market forecasts of 0.7%. Food prices increased for the first time since June 2023 (2.8% vs flat reading in July) due to fresh vegetables while non-food prices rose 0.2% YoY.

Japan: The annual inflation rate rose to 3% in August after remaining steady at 2.8% for the third straight month in July and touched its highest level since October 2023. It’s driven by elevated prices of electricity that increased the most since March 1981 (26.2% vs 22.3% in July), and gas (11.1% vs 7.4%), food (3.6% vs 2.9%), housing (0.7% vs 0.6%), furniture & household utensils (5.2% vs 3.7%), clothes (2.3% vs 2.2%), and culture (4.8% vs 4.4%).

Consumer confidence

US: The University of Michigan consumer sentiment rose to a 5-month high of 70.1 in September from 67.9 in August and exceeded market expectations of 69.3. This happened as the economic conditions gauge was revised higher to 63.3 and inflation expectations for the year declined to 2.7%.

Japan: The consumer confidence index rose to 36.9 in September from 36.7 in August but came in below market forecasts of 37.1. Households’ sentiment in the country improved for income growth, employment, and willingness to buy durable goods.

UK: Consumer Confidence indicator declined to a 6-month low of -20 in September 2024 from -13 in consecutive two months. This deterioration can be attributed to uncertainties before the next month’s autumn Budget.

Balance of Trade

US: The trade deficit widened to ~US$79 billion in July compared to US$73 billion in June and was in line with the consensus estimates. It’s the biggest deficit since June 2022 as imports rose 2.1% to US$345.4 billion, the highest value since March 2022, driven by purchases of computer accessories, non-monetary gold, etc., while exports increased 0.5% to a record high of US$266.6 billion, led by semiconductors, government goods, and financial services.

China: The trade surplus jumped to US$91 billion in August from US$67.8 billion in the same month the prior year. Exports grew nearly 9% (fastest pace since March 2023) to a 23-month high of US$308.65 billion while imports rose 0.5%, down sharply from 7.2% in July.

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