Falling industrial output vs surging PMI: Recession or recovery? Economic revival mystery explained

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February 13, 2020 6:30 PM

PMI does indicate the direction of industrial production but sometimes they do differ and now is one of those times.

factory, industrial output, IIP, index of industrial output, PMI, purchasing managers' index, factory output How much can the Index of Industrial Production (IIP) be correlated to the Purchasing Managers’ Index (PMI)? (Bloomberg image)

Industrial output in the month of December contracted despite a continuous rise in the manufacturing PMI since October 2019. This has raised an important question of how much can the Index of Industrial Production (IIP) be correlated to the Purchasing Managers’ Index (PMI)? Trends suggest that PMI does indicate the direction of industrial production but sometimes they do differ and now is one of those times. The economists also differ in their dependence on PMI data to analyse the economic situation in a better way. However, the consensus was on the estimate that it may take more than another half year for the industrial output to rebound.

“PMI is survey-based and thus inherently very volatile. To know the situation better, we have to look at the IIP numbers also, the finer details and other macro indicators. As of now, it seems a meaningful industrial output pickup could be further down the road as demand and credit supply remain weak,” Sreejith Balasubramanian, Economist, IDFC AMC, told Financial Express Online.

Also Read: Industrial output disappoints again; IIP contracts even as govt points to green shoots of revival

Restocking of inventory and a lower base may make the IIP numbers look shinier for a few months in the near future but the underlying recovery should take some time to come back, he added. The industrial slowdown has been affected by many global phenomena such as the US-China trade war, BREXIT, Coronavirus outbreak as well, which have kept the orders low. However, the PMI to escalate in the opposite direction to industrial output has taken a few economists by surprise.

“December’s IIP figure came as a shock to us too and it can be considered as an outlier, as the exact reason cannot be figured out,” Rajat Bahl, Chief Analytical Officer, Brickwork ratings, told Financial Express Online. For the industrial output to rebound, it may happen only in the second half of the next fiscal, he added.

It is not the first time when the PMI and IIP numbers have part their ways, it has happened in the past as well. But the steep rise in PMI this time has left hopes of a revival. “PMI and industrial output do not always correlate to each other and this is observed many times in the past as well,” DK Joshi, Chief Economist, CRISIL, told Financial Express Online. However, the sharpness of PMI in January may signify an uptick in the factory output but that can be established only after observing the factory output in the month of January, he added.

Meanwhile, the growth of the Indian economy is at a 6-year low, driven by domestic and global factors. On one side the capital goods and consumer durables are showing negative trends, the investment and consumption on the other side have shown subdued growth in recent quarters.

 

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