Brazil shines as India disappoints
India’s second quarter GDP recorded a significant slowdown, growing 7.1% year-on-year (y/y) compared to 7.9% in the first quarter. Growth of 7.6% had been expected. The government’s preferred measure, Gross Value Added - GVA - (which is GDP plus taxes and less subsidies) slowed by less, slipping to 7.3% y/y from 7.4%.
Brazil, by contrast, did better than expected, though it is a sign of how low the bar has fallen that a contraction of 3.8% y/y can be considered a positive surprise. Still, compared to the -5.4% recorded in the first quarter, this is a great improvement.
Indian data to put pressure on central bank
Higher frequency data in India has not been particularly strong over the quarter, and so supports the headline story told by GDP. Industrial production has picked up, it is true, alongside the manufacturing purchasing managers’ index (PMI) – though at 2.1% y/y and 51.7 respectively, these hardly seem indicative of blistering growth.
Meanwhile, the composite PMI has weakened somewhat, and auto sales have softened. Part of the explanation may lie in the slower pace of credit growth compared to the first quarter. We expect pressure to be placed on the new central bank governor to move to address this by using central bank reserves to recapitalise the banking system, particularly after such a marked slowdown.
Brazil on the rise?
Brazil’s monthly data had suggested a much better second quarter following a dismal first. Business confidence, typically a good indicator of investment, had staged a strong recovery on impeachment hopes towards the end of the first quarter.
For the consumer, new vehicle registrations and retail sales had posted similar rebounds as they stride back towards positive growth territory. Trade, though still positive, weakened slightly, reflecting the stronger currency and better domestic demand. All of this was reflected in the breakdown of the national accounts.
Investment made a positive quarterly contribution, its first in some time, though still contracting annually. Consumption also improved considerably in year on year terms. Net exports and government spending both deteriorated compared to the first quarter, thanks to a stronger currency and fiscal restraints, respectively.
Concerns raised over India
For India, while headline GDP has moved in the direction higher frequency data might have suggested, a breakdown of the national accounts still raises questions.
Manufacturing, according to the national accounts, slowed slightly in y/y terms, despite the pick up in the PMI and industrial production data. Consumption, though, slowed in both the quarterly and monthly releases, with the national accounts showing a deceleration from 8.3% last quarter to 6.7% y/y in the second quarter.
Government consumption posted a large increase, which must raise some concerns over the sustainability of this growth rate if investment can not be encouraged to pick up. However, some of the investment weakness is due to base effects, reflecting strong government support in Q2 and Q3 of last year, so this should not persist much further.
Brighter outlook ahead for both
Overall, the direction of travel is encouraging for Brazil, and less so for India. However, the latter has finally cleared the reform hurdle posed by the Goods and Services Tax, which should generate improved business sentiment and investment.
Meanwhile, Brazil presses ahead with the impeachment of President Rousseff, which now looks all but certain, and is making some progress with its own reforms. We think the outlook for both economies is positive and expect stronger growth in the third and fourth quarters in each.
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
The fund is authorized by the SFC but such authorization does not imply official approval or recommendation.
Schroder does not provide any securities or investment products for offer, solicitation or trading within The People’s Republic of China (PRC). Should illegitimacy arise thereof, contents of this document shall not be construed as an offer or solicitation or trading for such securities or products. All items mentioned herein are sold through financial products issued by commercial bankers in the PRC under regulations by the China Banking Regulatory Commission (CBRC). Investors should read the relevant documents clearly before invest in the mentioned funds. Please consult the relevant commercial bankers in the PRC and/or professional consultants if necessary.
This material including the website has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.