Factory output expands for 2nd straight month

New Delhi: After demonetisation hit manufacturing hard in December, factory activities saw a second month of expansion in February and at a rate higher than in January, shows the Nikkei purchasing managers’ index (PMI) survey. Even then, it might not be possible for manufacturing activities to grow higher in the fourth quarter (January-March) of the current financial year than the third quarter. 

After rising to 50.4 in January, the PMI inched up to 50.7 in February. The 50-point mark separates expansion from contraction, indicating the health of the sector improved to a greater extent, the survey said. The December figure of 49.6 showed the beating due to demonetisation, contracting for the first time in 11 months.

Average PMI in the third quarter stood at 52.1 points. To reach that level in the fourth, the PMI has to be 55.2 in March, which looks unlikely. Manufacturing grew 8.3 per cent in the third quarter against 6.9 per cent in the second quarter, according to data issued by the Central Statistics Office on Tuesday. 

In February, the volume of incoming new work increased for a second straight month; new export orders expanded for the first time since November 2016. Rates of growth for both production and order books picked up since January but remained marginal.

The rate of backlog accumulation was the fastest since October, the survey said. 

However, inflationary pressures intensified, with input costs rising at the quickest pace since August 2014 and output charge inflation climbing to a 40-month peak. Higher purchasing costs for metals, chemicals, energy and plastics were reported. 

“This is likely to cause demand from price-sensitive consumers to fall and could potentially jeopardise the economic recovery,” warned Pollyanna De Lima, economist at IHS Markit and author of the report.

Destocking continued in February, with holdings of inputs and post-production inventories both decreasing. The latter dipped for a 20th month in a row and at the second-sharpest pace in this sequence. The contraction in stocks or purchases was only mild in comparison.

While greater output needs to be encouraged by some companies to step up buying, manufacturing employment fell marginally, the survey said. The surveyed companies indicated that current staffing was sufficient to cope with existing production requirements.

Confidence among Indian manufacturers was relatively subdued in February. “In fact, confidence towards the year-ahead outlook for production dipped since January to the second-lowest since the end of 2015,” said De Lima. 

Earlier in the day, similar figures issued for China showed manufacturing companies experiencing a stronger improvement in overall business conditions, with the latest upturn in new work being supported by the fastest increase in new export business since September 2014.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.