inflation: There’s risk of a mild recession in US in 2023; expect inflation to move above 8% in India by Sept: Sonal Varma
[ad_1]
Are you seeing early signs of improving micro as in India, the CPI data has come in lower. Is it too early to read much into it?
Our view is it is a bit too early to read too much into it. The global backdrop remains quite adverse in terms of tighter global financial conditions and yet elevated commodity prices and I would say medium term risk of slowing global growth. Back home, yes the May CPI reading was a bit of a reprieve but May was the month where base effects are also positive on top of the cuts in excise duty and a slightly softer momentum.
But as we have just seen with the WPI numbers, pipeline price pressures remain, we are still seeing upwards pressure on food prices and a lot of pending energy price increases which we think are likely to happen going forward. So, we do not think inflation has peaked. We are expecting inflation to move up from May, in fact moving above 8% by September and on average we are looking for CPI at around 7.5% which is above the RBI’s revised projection of 6.7%.
7.5% could be quite dire. What according to you would contribute to that sharp rally because apart from crude, agri prices and vegetable prices have come off. Most industrial metal prices are coming off. Has it all got to do with crude and crude induced other elements?
It is a lot more broad-based than just crude. If one looks at the food basket, there is upward pressure on the cereal price inflation although we have seen some softening on pulses and edible oil but there are other price pressures like milk prices moving up and feedstock costs starting to move higher.
The heat wave also means there will be an upward pressure on vegetable prices outside of the seasonal increase in vegetable prices that we see. Within the energy complex, at the current level of crude prices, there is under recovery on petrol and diesel. The imported coal that India is now looking at to get the power plants running also implies there would be pressure to pass on some of the electricity tariffs going forward.
Reopening is putting an upward pressure on a lot of services whether it is airfares or cinemas etc. and of course metals are down but overall there is still margin squeeze on companies. So, we are still seeing a lot of price pressures across goods categories from things like clothing to even white goods on a regular basis. Every month, it is a consistent increase plus there are other second round effects to keep in mind that rural wages still remain quite low.
But typically, when inflation moves up, there is an indexation to take into account the higher cost of living. Rental inflation on the CPI is rising only 3.5 to 4%. We do not think it reflects the actual increase in rentals that are currently taking place. If all that is put into account, I do not think it is just about oil. Obviously oil is extremely important for India but it is a lot more broad based than just oil.
Not many on the Street are still very actively talking about all the other elements which have upside risks. I wonder what would it do to growth in general. What is your own growth estimate for the full year? Could it force the hand of the regulator as well for very aggressive rate hikes from here on?
There is sufficient growth momentum right now as we saw with the April industrial production numbers. Sequentially, momentum is strong. There is reopening of the services segments that are still catching up and while the RBI is hiking rates, I would say financial conditions are still accommodative. So, that is still positive for some of the sectors in terms of credit uptick. In real estate for instance, there is sufficient momentum right now.
If we look forward beyond the next three to six months which is where there is sufficient momentum, we do think growth headwinds will start to pan out. The biggest one is high inflation in India itself which tends to be a negative both for mass consumption in terms of the real disposable income squeeze and also for corporates to the extent that they cannot pass it on and there is a margin squeeze to the tighter financial conditions domestically because of the rate hikes. Also, the gradual liquidity normalisation will have an impact down the line.
Three, we think the global growth cycle is set to moderate, led by the US and Europe. It is more of a synchronised global growth slowdown that should play out over the next six to 12 months. If we put all of that together, our expectation is FY23 should be okay as we are looking at growth numbers between 7-7.5% but in FY23, we expect growth rates to moderate. Our projection is in the 5.5- 6% range.
How are you looking at the health of the economy? In in terms of capacity utilisation, the capex word seems to be back. Many auto companies have announced capacity addition. M&M is setting up their first new tractor plant in almost 10 years. Do you see capacity utilisation in the economy to edge higher?
Capacity utilisation in the next three to six months should edge higher because there is sufficient momentum and that is going to be positive for the industrial cycle. As such capacity utilisation rates should head higher. Now in terms of the more medium term outlook on the capex cycle itself, we think it is more of a bottom up micro story rather than a top down macro story. There is momentum on sectors like chemicals or metal machinery for instance but at an aggregate, we do not see a sign of a turnaround in the private capex cycle.
Given the global growth outlook, the tighter financial conditions at home and abroad and greater demand uncertainty, our view is it is going to be more of a select opportunity in terms of capex rather than 2003-2007 style capex cycle.
What are your thoughts on the way things are shaping up globally with the latest US CPI data point? Do you see the UF Fed continuing with rate hikes while the indicators are showing massive collapse in demand? Housing and mortgage data show demand destruction, How would things shape up there?
The question to ask is why is the US seeing moderation in demand? What is different in the US is inflation is not just because of supply bottlenecks but also because of stronger demand and inflation in specific items has reached a level where inflation is becoming a headwind to growth, in terms of driving consumer buying intentions for various items.
At this stage, the risk for the Fed is in terms of inflation becoming more generalised and that not only impacting today’s demand but also becoming more of a wage price spiral and being a negative on medium term growth.
Our view is that the Fed will do whatever it takes to bring down inflation which in the current context implies more aggressive frontloaded rate hikes. We are expecting a 75 bps hike at the June meeting this week followed by another 75 bps in July, a 50 bps in September and 25 bps thereafter with a terminal rate of between 3.75 to 4%. It is important to bring down inflation and ensure inflation does not become generalised in the US. Of course, the risk with this aggressive approach will mean some growth sacrifice. We do think there is going to be disappointment on growth in the US in 2023.
Could that disappointment be to the extent that the US also could come on the brink of recession, if not there already?
It is a risk. It is not our base case right now. But with growing evidence of sticky inflation and the need for more aggressive Fed action, the risk of a mild recession in the US not imminently, but sometime in 2023 has risen.
I am curious to know your thoughts on what would that mild recession in the US and already challenged growth in other parts of Europe, China would do to demand for oil and energy?
Yes that is the tricky one. The resilience of oil prices to demand issues including the China lockdowns in April was one of the big surprises. It looks like the supply side is playing a major role in driving the oil prices– be it the impact on Russia or the hit on Libyan oil fields overnight. Plus the big transition towards green energy has reduced the incentive to invest in fossil fuels. So we do face supply challenges on the oil side.
On the demand front, as economies are reopening, travel is back and that demand is also coming back and the subsidies and tax cuts that governments have given across countries mean we have not seen that amount of demand destruction yet on oil. Our view is average oil prices for 2022 will be around $110 per barrel that is the assumption we are working with.
[ad_2]
Source link
