GDP growth, Weak Tax collections, US Jobs and more...
This Week In Data #33
In this edition of This Week In Data we cover:
June quarter GDP release and what it means for subsequent quarters
Slowdown in tax collections
Softening in US labour market
Slow decline in Euro area CPI
In case you missed, we released our third DashboardPlus covering the Mutual Fund sector this week. This video gives you a quick overview of it.So, India’s GDP grew a shade under 8% YoY during the June quarter. On an absolute basis, that is a strong number. However, the consensus estimate was for 7.5% growth, so the actual print was only slightly above expectation. The same analysts who estimated GDP growth to be around 7.5% for the June quarter estimate that for the next few quarters GDP growth will be around 6% - 150bps slower. And given that the first quarter’s print has only slightly beaten their collective expectation, their estimates for the next few quarters are unlikely to change materially. So sequentially, as things stand, GDP growth will decelerate markedly over the next few quarters.
And the reason they are anticipating a deceleration in growth is twofold. On the one hand, the RBI has increased interest rates sharply in FY23. This is flowing through to the economy in terms of higher interest rates which will impact growth. On the other hand, the weak rainfall will impact agriculture which will in turn feed into rural demand. And it is still possible that analysts are overcautious. Like how the much-anticipated US recession has so far refused to show up. But in any case, an average growth of 6% is a perfectly solid outcome.
Lastly, the one thing that has gone missing from the GDP data release (and not just this release) is the capex cycle. While every analyst worth his salt is trying to predict when will the capex cycle revive, unbeknownst to almost all of us, the capex cycle has already seen a revival. Capex, relative to GDP, is already at its highest in a decade. And at 34% of GDP, during the last 4 quarters, it is only 1ppt below the all-time high reached in the early 2010s.
And the reason why the analysts have missed this capex cycle is because it has been very different from the last cycle. The last cycle was largely about big infrastructure and manufacturing projects. In sectors such as Roads and Power the contribution the private sector participation was very low, and it went up significantly. Sectors such as Steel and Refining also saw large greenfield projects. The last few years is likely to have seen more granular and incremental capex (brownfield) rather than greenfield and in very different sectors.
Even as GDP data was buoyant, Tax collections, especially direct taxes, have remained weak. While corporate tax collections grew in July after having declined in each of the preceding 3 months, Personal income tax collections declined in July. In the first 4 months of this financial year, corporate tax collections have declined 10% YoY while income tax collections are up a modest 6% YoY. Direct tax collections are a crude proxy for corporate profits and personal incomes, and both are thus suggesting a material slowdown. Worth noting is that the government has estimated that corporate and personal income tax collections will grow ~10% during this year. As against this estimated growth, tax collections have declined in the first four months of this year.
GST collections too are undershooting the budget estimate so far. In the first 4 months of this year, GST collections (net to center) have grown by 10% YoY, slower than the 12% budgeted for the full year. Some of this slower growth in taxes is attributable simply to slower nominal GDP growth which is now running in single digits. And tax buoyancy (especially direct taxes) is like beta, it works both ways. But the bottom line is that unless this trajectory of tax collections changes in the next couple of months, it would in addition also mean fiscal stress for the government. And in an election year when the government will not want to cut expenditure.
Globally this was a data-heavy week. And the most important data release was the US non-farm payroll data yesterday. The US economy added 187K jobs in August. This was higher than the market expectation of ~170K addition. However, the job addition data for the previous two months has been revised down by 80K for June and 30K for July.
On a net basis, the last three months have thus seen just under 150k jobs being added on average. This is almost half the average of the first five months of this year (~290k). So, the US labour market is softening. And the Fed will take comfort from this.
Euro area released its flash CPI estimate for August. And it printed 5.3% YoY, the same as in July. Like in India, Food is the biggest driver of inflation in the Euro area – in August the food component of the CPI was up almost 10% YoY.
While inflation has moderated in recent months, almost the entire moderation is due to the base effect. The 2yr Cagr of CPI inflation has remained sticky at just over 7% since the start of the year. So, what does the ECB do? It has kept the door open for further rate hikes. Does it follow through on this? And if it does, Euro area GDP growth which is already running below 1.5% on a YoY basis will moderate further. Talk about being caught between a rock and a hard place.
That’s it for this week. Next week we will cover the key monthly releases for India (and there will be several of them). In addition, we will also get China’s foreign trade data.
But there is a much more important event prior to that. And its happening today! And at the risk of jinxing it, here is the original ‘mauka mauka’ campaign. Enjoy the campaign and the match and may the best team (which is of course Team India) win. Amen…