Rise in new orders boosts manufacturing PMI to 7-month high in December

But weak market conditions keep firms spooked and business optimism low

A sudden boost in new orders helped the beleaguered manufacturing sector surge ahead in December even as business optimism fell to a three-year low, with firms remaining spooked by weak market conditions, said a monthly global survey released on Thursday.
 
The widely tracked Nikkei India manufacturing Purchase Managers’ Index (PMI) rose to 52.7, a seven-month high, from November’s 51.2.
 
In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction. The rebound in growth comes after October’s two-year low PMI performance at 50.6.
 
However, official data shows that contraction remained entrenched in the manufacturing sector till November. India’s overall industrial production fell 3.8 per cent in October, after contracting 4.3 per cent in September, lowest in eight years.
 
On the other hand, the output of eight core sectors of the economy fell for a third straight month in November, contracting by 1.5 per cent. Output had crashed by a record 5.8 per cent and 5.2 per cent over the preceding two months as a broad-based decline gripped most sectors.
 
But for December, PMI painted a favorable picture with factories pumping up production to a 10-month high. This was attributed to new orders rising at their fastest pace since July, companies ramping up production and resumed hiring efforts.
 
At the sub-sector level, growth was led by consumer goods, though intermediate goods also made a stronger contribution to the headline figure. But, the crucial capital goods segment remained in contraction, the survey pointed out.
 
Companies that signalled growth commented on the securing of new work, the successful launch of new products and improved technology. New work increased solidly, with the pace of expansion picking up to the fastest since July. Where growth was noted, firms reported marketing successes, new product drives and better demand conditions.
 
However, new export orders contributed a small part of rising sales. In 2019, manufacturers had fallen back to demand from overseas to rescue them at times of lax domestic demand. Foreign orders expanded for the twenty-sixth month in a row, albeit modestly, the survey said.
 
As a result of rising fortunes, more firms reported they have stepped up hiring efforts at the strongest pace since February. Despite this, outstanding business rose further. In November, the survey had noted massive layoffs by firms.
 
Firms also increased input buying at the year-end, following contractions in each of the prior four months. The rise was only marginal, however, and failed to have an impact on vendor performance.
 
Although stocks of purchases continued to decline, the contraction lost strength. In fact, the pace of depletion was only fractional. On the other hand, holdings of finished products decreased sharply in December.
 
Amid reports of higher prices paid for chemicals, food, metals, paper, plastics and textiles, average cost burdens increased further. Moreover, the overall rate of inflation reached a 13-month high. In order to protect margins, goods producers lifted their fee again in December. The rate of charge inflation was solid and the quickest in close to three years.
 
Business sentiment had strengthened in November, with panel members expecting advertising efforts and product diversification to support output growth in the year ahead. That said, the Future Output Index was well below its average, as a number of firms were concerned about the state of the economy.
 
Despite the improvement in operating conditions during December, companies were cautious regarding the year-ahead outlook. “However, a note of caution is evident from the survey’s measure of business confidence. The degree of optimism signalled at the end of 2019 was the weakest in just under three years, reflecting concerns over market conditions, which could restrict job creation and investment in the early part of 2020,” said Pollyanna de Lima, principal economist at IHS Markit.
 
But on an average, the survey pointed out, production is expected to expand in the coming 12 months.