Domestic demand pushes manufacturing activity in June

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1St july 2016

The manufacturing Purchasing Managers' Index or PMI rebounded to 51.7 in June from 50.7 in May. The upturn is significant when compared to the average 0.5-point decline between May and June over the last 10 years. Moreover, it reinforces our view that the weakness in the preceding two months (April-May) was partly driven by transitory factors, like elections in five states, says Nomura in a report.

It says, "The PMI data suggest that external demand remains lacklustre, even as domestic demand continues to support growth, led by consumption. Meanwhile, margins are starting to be squeezed. The manufacturing PMI averaged 51 in Q2 2016, down from 51.5 in Q1, although Q2 ended on a positive note. In our base case, we expect gross domestic product (GDP) growth at market prices to pick up to 7.3% in 2016 from 7.2% in 2015, largely driven by private consumption and public investment."

During June, both output and new orders rose to a three-month high. The new orders index picked up to 52.9 from 51.3 in May, mainly led by an improvement in domestic demand, while the export orders sub-index improved to 50.6 from 49.6 in May, but the payback was quite weak. Backed by rising new orders, the output index rose to 52.7 from 50.7 in May, with consumer goods remaining the best performing sector, Nomura says.

Finished goods inventories inched up to 46.9 in June compared with 46.0 in May, but persisted below the 50 threshold for the twelfth consecutive month. This suggests that, even while firms are expanding output, they continue to dip into inventories to fulfil demand, the report points out. 

With rising new orders, the new orders to inventory ratio remained elevated at 1.13 as against 1.12 in May. At the same time, the backlog of work sub-index also rose to a 15-month high of 51.8 from 49.5 in May, which indicates that the pace of expansion in output should accelerate in coming months.

According to Nomura, during June, both input and output prices eased, however margins were under pressure. The input price index moderated to 53.8 from 54.3 May, but remained above 50 on higher costs of metals, chemicals, petrol, food etc. The output price index moderated as well, to 50.1 from 50.5. As a result, the ratio of output to input price indices – a proxy for profit margins – stood at 0.93 in June, unchanged from May but down from a peak of about 1.00 in mid-2015. This suggests that profit margins are being squeezed from rising input costs amid a rather gradual recovery in demand, it concluded.