Growth is here to stay, shows OECD model

The week gone by had some good tidings for the economy. At 7.4 per cent for the quarter ended September, GDP growth bettered the first-quarter growth of 7 per cent, with manufacturing activity showing a sharp uptick.

The RBI, too, in its monetary policy announcement, did not mark down its earlier growth projection of 7.4 per cent for 2015-16.

Does this portend better times for the economy? That could be the case, going by the OECD’s Composite Lead Indicators (CLI). The CLI moved above 100 — indicating an expansion — in August.

The index held above 100 in September, too, implying that the trend can sustain.

But, at the same time, the Purchasing Managers Index (PMI) of manufacturing companies for November 2015 touched a two-year low of 50.3 and the PMI of service companies, too, headed lower, indicating that business sentiment is not yet upbeat.

To find out what’s in store for the economy, the OECD Composite Leading Indicators (CLI) are a good measure to turn to. Using published GDP numbers of a country as the reference, the CLI is designed to signal turning points in economic activity at least six months in advance.

With its trend line at 100, the CLI numbers trace an economy through the four stages of expansion, slowdown, recession and recovery.

A CLI above 100 indicates ‘expansion’ and a reading below 100 but rising points to a ‘recovery’.

As early as December 2013, at 98, the CLI indicated a ‘tentative positive turning point’ for India. This was even as on-ground economic indicators such as the Index of Industrial Production hovered over negative territory and GDP continued clocking sub-5 per cent growth. Both industrial and GDP growth have picked up since then.

Besides, the CLI readings beginning December 2013 have also moved up steadily to 100.1 as of September 2015 (latest available number). This indicates that the economy has already moved from ‘recovery’ mode into ‘expansion’ mode.

Given that CLI indicates economic activity at least six months in advance, this shows that growth is here to stay.

Almost at the same time as the turnaround in CLI in November 2013, the PMI of manufacturing companies breached the 50 mark after showing a contraction in previous months.

It has remained above 50 since then with the December 2014 PMI touching a two-year high of 54.5.

Even today, though the PMI has touched a low of 50.3, trends in some sub-components such as steady new order flows agree with the CLI on bettering prospects.

What’s disrupting the uptrend are some pain points.

One, while there has been a recovery in demand in the economy, it has not been broad-based.

PMI reports of the last one year show that while demand for consumer goods has been picking up well, demand for intermediary and capital goods has remained lacklustre overall, though they did show some spurts of growth now and then.

Two, given that the growth has not been all-round, companies have remained uncertain about the sustainability of the upturn.

Hence, both the manufacturing and service sectors have shown reluctance in hiring. A stagnant job market, in turn, has not helped boost demand.

And, three, the PMI reports show complaints about delayed payments from clients.

This indicates that companies have perhaps been struggling with stretched working capital cycles. Banks being reluctant to pass on benefits of lower lending rates to clients could have played a role in this.

These factors also explain why capital goods companies have not been able to show sustainable growth.