GDP Growth for 2009-10: Is Surprise on Upside in the Offing!!!!

The consensus estimate for 2009-10 GDP growth is 6 per cent. The estimate was based on poor monsoon (23 per cent below normal) and drought situation in larger parts of the country leading to an expected deterioration in agricultural output. But recently published industrial growth rate data for the month of August 2009 at 10.4 taking the overall growth rate to 5.8 per cent (for Apr.-Aug. 2009) could alter the number game and therefore, bottom out story. According to my personal estimate, GDP growth could clock 6.7 per cent even after taking consideration of subdued agricultural growth rate. Even if agriculture (with a weight of 17 per cent of GDP) experiences de-growth at 3 per cent (growth at 1.6 per cent during 2008-09), the above would get offset by a relatively stronger industrial production. Industrial growth rate (with a weight of 26 per cent of GDP) is expected to be driven by mining, capital goods, consumer durables and partly by base effect. Industry is estimated to clock 7 per cent growth (2.6 per cent during 2008-09). Considering the strong linkages industry has with services sector (with a weight of 56 per cent of GDP), the latter is estimated to grow at 9.6 per cent (9.4 per cent during 2008-09). If one compares the q-o-q GDP growth data of last fiscal and current one, a mirror image of last fiscal could be observed. While 2008-09 saw a declining growth phase in the last two quarters owing to global meltdown following Lehman Brothers collapse during September 2008, this year the story would be different with growth recovering sharply in the last two quarters. The poor agriculture growth is expected to be more than compensated by disbursal under NREG Scheme in rural areas and payment of remaining 60 per cent sixth pay commission arrears, offsetting the drought effect and leading to an increase in demand for consumer durables, especially autos and white goods. So, keep the fingers crossed.

WPI Inflation: Has the Base Effect Completely Worn Off!!!!

Contrary to consensus estimates of 1 per cent inflation (WPI-inflation) for the week ended Sep. 26, 2009, the actual inflation turned out to be on the lower side at 0.70 per cent. Question arises why it appeared lower than previous week’s (i.e. for the week ended Sep. 19, 2009 at 0.83 per cent). A look at WPI data tells you that the base effect would have completely got wore off by October 2009, which was also the popular perception some times of policy makers and economists some times back. But for the steep rise in food inflation (food article annual point-to-point inflation 15.5 per cent for the week ended Sep. 26, 2009) during last couple of months, the base effect came to end for the week ended Sep. 05, 2009 with an annual inflation of 0.12 per cent. Thereafter inflation slowly crept up lending credence to 1 per cent consensus estimate for the weak ended Sep. 26, 2009. But here lies the caveat.

A careful look at the WPI data tells you that base effect is yet to wear off and might push inflation lower in the range 0.60 per cent plus or minus 10 bps. This is further supported by a drop in food price inflation as it shows that food price inflation on a sequential (week-over-week) basis, though marginally, is on a declining phase. But food inflation could shoot up in coming weeks taking account of the flood situation in AP and Karnataka which destroyed a majority of rice and cash crops. Lets wait and watch for the actual number to play out. The upside risk to the above estimate could be more than anticipated rise in food price inflation (food price inflation is estimated to come down to 15 per cent for the week ended Oct. 02, 2009), changing the number game thereof.

Outlook: Gold: Oct/2009-Jan-2010

The Spot Gold is at $1052/oz. Traders predicting a "blue skies scenario," led by a resurgence in dollar weakness and weak USD risk appetite.  The most recent trigger was interest hike of 25 bps by Australian Reserve Bank to 3.25 %. Australia's September unemployment rate dropped to 5.7% from 5.8% in August,
contrary to expectations of a rise to 5.9%. The data added to a bullish week after the Reserve Bank of Australia Tuesday became the first central bank among Group-of-20 nations to raise interest rates since the global financial crisis.

This indicated that part of the global economy is stabilizing and inflation may set in. On contrast, US recovery is still uncertain, given the recent up-tick in unemployment numbers at 9.8%. This is almost ascertain, that , there is no quick recue for USD. And the plung may continue, reassuring no near reversal in broad exchange rates. Investors are likely to derset USD as store of value.

Till there is a trend reversal in USD or Fed raises interest rate ( indicative of stability ), and something to do with capital flow revervasl from EMs, the show may go on. Additionally, denied  announcement from Saudi government about their plans to encourage oil-trade on basket of currencies and limiting dollar-denomination.
Expectation:
immediate term: ( 2wk- 1mo): Festive reasons. But, high prices discourage physical gold buyers. Range $ 1050-1070/oz.
Near term: ( 1mo-1qtr): Range: $1030-$1040. USD did not loose much sheen against Euro. Downside is potential. Emergence of stability in excluding US, rest of the globe, fresh uppish range in crude $72-$77/bbl. This may reinstate inflationary fears and natural hedge with gold.

WPI Expectations: Sep/26-Oct/17/2009

26-Sep-2009 :0.62%

03-Oct-2009 :1.49%
10-Oct-2009: 1.86%
17-Oct-2009: 2.36%