GDP Q2FY19: Growth Slows On Weak Consumption

GDP Q2FY19: Growth Slows On Weak Consumption

Q2 Gross Domestic Product (GDP) growth has slowed appreciably to 7.1% as against street consensus of 7.5%. Gross Value Added (GVA) grew at 6.9%.

Key Takeaways from the GDP Numbers

(1) GDP growth, though much smaller than consensus, hides the delayed bouncy of festive season which should get reflected in the next quarter.

(2) Government expenditure has supported growth through both expenditure and investment.

(3) Core GVA (excluding Agri and Public Services) grew at 6.6% (y-o-y) indicating slower growth in both Industry and Services.

Key Implications:

Economic Growth probably peaked in last quarter and is now trending lower. Government expenditure continues to remain a source of support for the economy as segmental growth in industry remains sluggish even at a lower base.

Industry Slows Sequentially

Core GVA grew a measly 6.65% in Q2FY19 dragged by subpar performance in manufacturing, mining and financial services. Electricity and utility services continued a strong performance growing both sequentially and annually at 9.2%. Construction activity, which has been led by a pickup in government’s focus on infrastructure sector, clocked an unimpressive growth at 7.8% given that it had a low base for 2.8% for Q2FY18. With PMI data still indicating expansion and 8 core industry growth at 4.3% the industry is expected to grow at a suboptimal level for the next quarter as well.

Private Consumption Decelerates, Imports Bite

Private consumption expenditure grew at 7 percent after recording 8.6 percent growth in Q1. Private consumption contribution to growth came in at 3.8% of overall GDP growth which is lower than 4.7% growth in the last quarter. A delayed festive season seems to have reduced consumption is Q2 and should reflect partly in Q3FY19. However, with NBFC liquidity stress, delayed effect of interest rate hikes and a hit to disposable income from high oil prices yet to show up, the private consumption is likely to be subdued for the next quarter as well. Q2FY19 numbers paint a sombre picture for private consumption. Government consumption on the other hand came in at 12.7% as against 7.6% in the last quarter and just 2.9% in Q2FY18. Tight fiscal position may keep government expenditure to materially alter the complexion of the GDP for now.

Net exports have taken nearly 3.9% from GDP growth this quarter. The negative effect of rising oil prices and a trade deficit has played out on the overall growth. With a steep fall in oil prices this impact is likely to fade in coming months.

Nominal Growth Too Skids

Nominal GDP grew at 12% (y-o-y) in Q2FY19 versus 9.49% (y-o-y) same quarter last year but lower than 13.75% growth in Q1 this year. This indicates inflationary pressures are minimal and points to sluggish phase for corporate earnings and tax collections as inflation continues to remain lower.

Key Implications

GDP numbers have slowed somewhat. The lagged effect of rise in interest rates, tight liquidity and a not so booming festive season is likely to lead to slight downgrades in full year GDP estimates. Q2FY19 GDP numbers will allow RBI to pause on monetary policy and give government more reasons to continue expenditure and probably stretch the fiscal position a little more.

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