India’s animal spirits remain fragile despite economy reopening

An improvement in India’s exports and business activity in June signaled the worst may be over for the economy, but the rebound probably wasn’t strong enough to prevent the biggest quarterly contraction on record.

Four of the eight high-frequency indicators compiled by Bloomberg News gained last month, two were unchanged and the rest deteriorated. The needle on a dial measuring so-called animal spirits remained static though, as the gauge uses three-month weighted average to smooth out volatility in the single-month readings.

Despite the pickup in the monthly performance, gross domestic product is set to shrink 20% in the April-June quarter from a year ago, according to economists surveyed by Bloomberg. That’s in keeping with a cross-section of indicators from car sales to unemployment to Google mobility reports that paint a grim picture for Asia’s third-largest economy.

Business Activity

The purchasing managers index for India’s key services sector climbed for a second month in June to 33.7 as the nation started a phased exit from the world’s largest lockdown to contain the coronavirus pandemic.

While the PMI remains below 50, indicating a contraction in activity, it’s far above the record low of 5.4 in April. The manufacturing PMI also recovered last month, pushing the composite index higher to 37.8.

Exports

Exports contracted 12.4% in June from a year earlier, but the fall was softer compared with a 36.5% plunge in May. Imports fell at a faster pace—reflecting subdued local demand—and helped turn India’s trade balance into a surplus after 18 years.

Consumer Activity

While consumers—the bedrock of the economy—made a cautious return to shopping malls last month, their numbers are still down more than 90% from a year ago, according to data from ShopperTrak.

Car sales, another indicator of consumer demand, slumped nearly 50% in June from a year earlier, data from the Society of Indian Automobile Manufacturers showed.

Bank credit growth slowed to 6.2% year-on-year in June from 6.3% in May and around 12% a year ago, while outstanding bank credit picked-up slightly to 102.4 trillion rupees ($1.4 trillion) in June. Liquidity conditions tightened slightly in the month.

Industrial Activity

Industrial output contracted 34.7% in May from a year earlier, easing from April’s plunge of 57.6%. Manufacturing declined 39.3% year-on-year in May after a 67.1% drop in the previous month.

Meanwhile, infrastructure industries output shrank 23.4% in May from a year ago. The sectors, which make up 40% of the industrial production index, had contracted by a record 37% in April. Both data are published with a one-month lag.