India Q2: Darkest before dawn - Natixis

Low oil prices, structural reforms, and robust demographic growth should have made India the brightest story of emerging Asia, but bumps on the road are derailing India’s path to success, at least in the short-term, according to Trinh D. Nguyen, Senior Economist at Natixis.

Key Quotes

“The economy slowed to the lowest growth rate in three years to 5.7%YoY in Q2 from +6.1% previously.

1. Private consumption, a key anchor to India’s growth, slipped to 6.7%YoY (7.3% in Q1) while investment only marginally turned positive (1.6%YoY) after contraction in the previous quarter.
2. Government spending did expand by 9.5%YoY in Q2 2017 but was not enough to offset private demand slowdown.
3. And despite a global trade upturn, export growth weakened to 1.2%YoY in Q2 2017 from 10.3%YoY in Q1, contributing negatively to GDP.
4. One bright spot was the services sector, which remained buoyant with trade, hotels, transport, communication services recorded greater expansion.”

“Q3 2017 will likely be worse & the RBI will cut once more: High frequency indicators show that exports will still underperform in Q3. Credit growth remains subdued. One bright spot is the recovery of money in circulation, which will likely normalize by Q4 2017.”

“Beyond the short-term, India’s growth should stage a strong rebound helped by the diminished negative impact of demonetization and GST. Moreover, the rate reductions coupled with low oil prices should fuel demand not to mention the favorable base effects. With strong demand, any supply side reform should brighten medium term growth prospect.”