The outlook for business revenues amongst Indian manufacturers is largely positive.
The summer 2009 KPMG Business Outlook Survey, which surveys around 1,800 manufacturing sector firms across the BRIC region (Brazil, Russia, India and China), highlights a strong and broad-based rebound in sentiment following the drop seen in the aftermath of the financial crisis.
July’s confidence balances show sharp improvements from the winter survey and, in many cases, have returned to levels broadly in line with 2008 readings. Optimism is underpinned by expectations for strong demand, coupled with signs of improving economic conditions.
The headline net balance for business activity climbed sharply from +3.6 in January to +46.5. That was close to the reading of +47.0 posted last summer, and suggests that output levels will rise at a marked pace over the next twelve months. Confidence is highest in Brazil, while firms in Russia and China also predict robust rates of expansion. While Indian firms are much less upbeat than their counterparts elsewhere (and are also less positive than was the case last summer), confidence has still shown a clear improvement from January’s depressed level.
Commenting on the BRIC report on manufacturing Mr Yezdi Nagporewalla, Head of Industrial Markets, KPMG in India said “The Indian manufacturing sector is expected to enhance its attractiveness over the coming year.
Domestic demand stimulated by government spending and coupled with favourable global sentiments will have a positive impact on confidence levels."
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BRIC manufacturers are encouraged by the prospects for sales growth during the coming year. A net balance of +44.8 firms predict higher new orders – a considerable improvement from +4.9 in the winter. Consequently, business revenues are set to increase strongly, while expectations for company profits are the highest since the survey began in January 2008.
Panellists view increased new orders and an improving economic situation as the factors most likely to support growth of business revenues during the next twelve months. New product launches are also set to drive revenues higher. The major threats to revenues are perceived to be a potential relapse in economic conditions – which could undermine sales – alongside rising raw material prices.
With profits expected to grow strongly, BRIC manufacturers are set to step up capital expenditure during the next twelve months. Although the net balance of +22.0 remains below the levels seen in 2008, it is still a significant improvement from -7.4 in January. Companies are also set to raise their levels of investment in research and development. A net balance of +30.5 firms plan higher R&D spend, up from +13.1 at the start of the year.
Manufacturers across the BRIC region are planning to increase their staffing levels at a solid pace over the course of the next year, in contrast to expectations for net job losses in the January survey. Positive hiring intentions have been influenced by the prospect of growing pressure on capacity – a net balance for capacity utilisation of +36.2 is the highest since the start of 2008.
Average purchasing costs are set to rise at a sharper rate during the next twelve months. At +37.3, the net balance for input prices is up steeply from -8.2 in the winter. Similarly, output price expectations have rebounded, as signalled by the net balance climbing from -8.5 to +25.2.
Commenting on the latest survey findings, Ian Gomes, Chairman of KPMG's High Growth Markets Practice, said “BRIC manufacturing sector confidence appears to have swiftly returned to strength following the slump in confidence that ensued from last year’s global financial crisis. Robust growth is widely forecast – based on expectations of improving domestic demand, the success of government stimulus measures and signs of stabilisation in the world economy.”
He added “Faster growth is likely to be accompanied by a pick-up in inflationary pressures as demand for raw materials hardens and manufacturers recover some degree of pricing power. However, rates of inflation are forecast to be moderate in comparison with the elevated levels seen in 2008.”
NATIONAL SURVEY FINDINGS
BRAZIL
Expectations for Business Activity over next 12 months
The outlook for Brazil’s manufacturing economy over the coming year is decidedly brighter than it was six months ago. Slight pessimism regarding future activity levels in January gave way to widespread optimism in July, with a net balance of +64.9 companies anticipating output growth.
Underpinning July’s sharp increase in confidence regarding business activity was a similarly marked improvement in optimism about new orders. Over 68% of Brazilian manufacturers believe that they will receive more new work during the next twelve months, compared with only 2% that expect a decline. Consequently, capacity utilisation rates are widely expected to rise.
Brazilian manufacturers forecast a recovery of their pricing power in the coming year as economic conditions improve. A net balance of +45.9 for output prices signals that charge inflation is set to accelerate strongly, and contrasts with the negative reading of -2.2 in January. Accordingly, revenues are set to grow sharply. More than 65% of the survey panel predict enhanced revenues in twelve months’ time.
Respondents also predict a rise in input cost inflation in the proceeding year, as signalled by a net balance of +44.4, up from -0.4 in January.
The profitability of operations undertaken by Brazilian manufacturers will be higher in the coming twelve months, according to the latest expectations. With pricing power and market demand projected to increase, over 63% of companies foresee wider profit margins, against just 2% that anticipate a fall.
With activity levels set to rise, Brazilian manufacturers are planning to increase their staffing levels. A net balance of +45.9 firms expect growth of employment. Forecasts for capital expenditure and R&D are also up since the winter survey, as strong profits growth supports higher levels of investment.
RUSSIA
Expectations for Business Activity over next 12 months
Russia’s manufacturing economy is set to expand at a faster pace over the proceeding twelve months, with estimates for output, new business, profits and employment all up on January’s figures.
The net balance of Russian manufacturers anticipating higher levels of business activity in one year’s time rose to +49.7 in July, from +21.6 in January. Optimism in this area reflected improved confidence about new orders. At +47.0, the net balance of companies expecting a rise in new work was more than double that registered six months ago (+19.5). However, both net balances remained noticeably below those recorded last summer and in January 2008.
Approximately 56% of Russian manufacturers expect stronger output price inflation in the coming twelve months, reflecting forecasts of improved pricing power. Input price inflation is also forecast to accelerate; over two-thirds of companies predict that purchasing costs will increase at a faster rate over the next year.
Nevertheless, revenues and profits accrued by Russian manufacturers are forecast to rise solidly in the year ahead. In both cases, growth is predicted to be much sharper than was the case six months ago.
With workloads and production levels set to increase, Russian manufacturers expect higher capacity utilisation rates in the next year. This is signalled by a net balance of +8.3, up from +31.5 in January. Concurrently, firms are planning to recruit additional staff, with almost one-third of companies planning to increase employment.
Expectations regarding capital expenditure and R&D turned positive in July, in contrast to the winter survey. However, investment forecasts remain down on those seen in 2008.
INDIA
Expectations for Business Activity over next 12 months
Indian manufacturers are optimistic about the outlook for their business in the coming year, largely as a result of firmer demand and improved economic prospects. However, confidence remains substantially below 2008 levels and is the lowest in the BRIC region. A net balance of +22.5 firms expect growth of activity, up from -1.6 in January.
Levels of new business received by firms operating in the Indian manufacturing sector are forecast to increase over the forthcoming year, as indicated by a rise in the net balance for new orders to +18.8 from +3.6 in January.
The outlook for business revenues amongst Indian manufacturers is largely positive, with over one-third of respondents anticipating a rise in revenues over the year ahead. The resultant net balance was +14.0, up from zero in the winter. Correspondingly, companies expect the profitability of their operations to improve, as highlighted by a rise in the net balance to +19.9 from -2.6.
Staffing levels in the Indian manufacturing sector are predicted to expand over the coming year. The net balance for employment rose to +10.0 from +4.3 in January, although remained far lower than those recorded in 2008.
A net balance of +18.2 firms anticipate sharper inflation of input costs in the next twelve months, up from +10.8 at the start of the year. Companies expect to pass on a significant portion of the rise in costs to clients through higher output prices. The net balance for charges climbed to +10.5 from +4.3 in January.
CHINA
Expectations for Business Activity over next 12 months
A headline net balance for activity of +46.7 signals that Chinese manufacturers are highly confident regarding the outlook for their businesses over the next twelve months. This is up from +2.6 at the start of the year and is the highest since January 2008.
Companies operating in the Chinese manufacturing economy expect business revenues to rise sharply over the coming year, with the net balance rising sharply from -11.8 to +49.0. Growth of revenues is set to be supported by higher new orders. A net balance of +45.0 firms expect a rise in revenues during the next twelve months, up sharply from +3.9 in January.
Chinese manufacturers’ profits are widely anticipated to increase, as highlighted by a rise in the net balance to its highest reading (+37.3) in the short series history.
Price pressures are predicted to build in the Chinese manufacturing sector over the forthcoming year, with net balances for output (+19.0) and input prices (+35.3) climbing back above zero in July.
Staffing levels in the Chinese manufacturing sector are expected to rise during the year ahead, reflecting improved forecasts for incoming new work. This is signalled by a net balance for employment of +17.3, up from -3.0 in January.
Capital expenditure is expected to grow over the coming year, with the net balance increasing to +21.3 from -9.9 in the winter survey. The net balance for R&D also climbed from January’s low (+36.3 versus +23.0).
NOTES TO EDITORS
About the survey
The Business Outlook Survey for BRIC manufacturing is produced by Markit Economics for KPMG and is based on a survey of around 1,800 manufacturers that are asked to give their thoughts on future business conditions. The survey is produced on a biannual basis, with data collected and published each winter and summer. The current survey is based on responses from around 1,000 manufacturing firms.
The survey covers all four of the rapidly developing BRIC area nations: Brazil, Russia, India and China. The manufacturing sectors covered by the survey are: Food & Drink, Basic Metals, Mechanical Engineering, Textiles & Clothing, Vehicle Manufacturing, Chemicals & Plastics, Electrical & Optical, Timber & Paper and ‘Other’ Manufacturing – which covers areas of manufacturing not included in any of the other categories. The methodology of the Business Outlook Survey is identical in all countries that Markit Economics operates. The use of a widely recognised and well-regarded methodology ensures harmonisation of data, and allows direct comparisons of business expectations across different countries.
The Business Outlook Survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and +100, with a value of 0.0 signalling a neutral outlook for the coming twelve months. Values above 0.0 indicate optimism amongst companies regarding the outlook for the coming twelve months while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase.
About KPMG:
KPMG is the global network of professional services firms who provide audit, tax and advisory services. KPMG Europe LLP subsidiaries and associated entities operate in five countries across Europe with over 23,000 partners and staff. The KPMG Europe LLP group recorded consolidated revenues of €3.4 billion and pro-forma revenues for the five countries for 2008 totalled €4.0 billion. KPMG Europe LLP, a UK limited liability partnership, is a holding company of a number of members of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. KPMG Europe LLP and KPMG International provide no client services. The "KPMG Europe LLP group" means KPMG Europe LLP, its subsidiaries and affiliates.