Schroders: Indian and Brazilian growth figures likely to prompt easing

India’s economy grew 6.1% in the first quarter of 2015, some way below City expectations of 7% growth, year-on-year, and much lower than the previous quarter’s 7.5% growth. Brazil, which released its figures at the same time, managed to beat expectations by contracting less than expected, at 1.6%. We expect further growth, and further contraction, for India and Brazil respectively as the year progresses.

India recently switched to using gross value added (GVA) as its preferred growth metric rather than gross domestic product (GDP). The difference between the two is that GDP includes the net taxation position (taxes less subsidies), which might explain how Indian GDP was able to beat expectations and grow 7.5%, year-on-year (versus the 6.1% growth recorded by GVA, which does not include net tax). Oil price falls since December have enabled significant subsidy reductions. Beyond that is difficult to compare the two numbers as different breakdowns are provided for each. 

Overall though, growth looks to have been supported by stronger consumption and investment, with the manufacturing sector in particular performing well, against a backdrop of falling government spending. However, growth in most other sectors was weaker than the previous quarter, perhaps accounting for the miss versus expectations, though there is some question over the accuracy of the new series. For example, looking at the (very limited) historical data, there appears to be a discrepancy between growth as recorded by GVA and the performance of higher frequency data.

A breakdown of the Brazilian numbers reveals strong net export performance as all other sectors of the economy contracted, with consumption growth falling the most; from 1.1% growth in the final quarter of 2014 to a contraction of 1.5%, year-on-year. Given the recent unemployment, wage growth and consumer confidence numbers, this is unsurprising. We still expect further contraction from here, with the consumer unlikely to recover given the ongoing increase in unemployment, and the further blows to investment as the Petrobras investigation proceeds.

In both economies, we think the numbers will present a case for a more dovish central bank stance, though India – given its lower inflation – has scope to move sooner. We expect a further 25bps cut at the next meeting. For Brazil, the central bank is still battling to anchor inflation expectations, and seems unlikely to turn dovish just yet. But we still believe that growth will deteriorate further in the second and third quarters, and will be of sufficient concern to prompt easing at the end of the year.