Inflation to impact profitability and growth: S&P Business Outlook Survey

Business outlook weakened in February as firms said that inflationary pressures would harm growth, according to S&P’s Business Outlook Survey.

The headline value of the index or the net balance declined to 21% in February compared to 28% in October, indicating a weaker degree of optimism. The global average was 32%, whereas the emerging markets averaged 33%, as per the report released on Monday.

Of the 12 countries with comparable data, India, Brazil, and Japan were the only three countries to report a decline in net balance.

The net balance is measured on a scale of -100 and 100, where a positive value signifies optimism. It is calculated by subtracting the percentage of participants expecting a deterioration in outlook over the next twelve months from those expecting an improvement.

“Indian companies became more concerned about inflation and its detrimental impact on growth prospects during February, leading them to downgrade their forecasts for output and profitability,” said Pollyanna De Lima, Economics Associate Director, S&P Global Market Intelligence.

The decline in sentiment spurred a reconsideration of budgets by companies. Fewer companies in the survey, with 8,000 participants, now aim to invest in fixed assets than projected in the October round.

The survey highlighted that the net balance, or the net number of participants reporting plans to invest in physical assets, was the lowest since October 2021.“Confidence surrounding R&D spending was also at its weakest since October 2021, with the net balance for India well below the average for emerging markets,” the report highlighted.

Goods manufacturers seemed more upbeat about capex than service providers. But hiring sentiments were similar for both, as companies reported an intention to expand operating capacities to accommodate new business growth.

Firms identified some opportunities to the outlook, including demand resilience, product diversification, advertising and pipelines of new work.

Inflation concerns
“At the one-year horizon, Indian private sector companies foresee further price pressures. Inflation expectations for input costs intensified, but were the lowest globally, while that for staff costs moderated, De Lima said.

Firms indicated that competitive pressures might restrict pricing power on the output front. They kept the outlook unchanged.

The PMI for services and manufacturing released a fortnight ago indicated input inflation but said that only a handful of firms passed on prices to consumers.

Consumer inflation rose to 6.5% in January, higher than the Reserve Bank of India’s upper tolerance band of 6%. In February, the central bank had raised rates to 6.5%–the highest in five years.

India will release consumer inflation data for February today.

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