PMI for services in February expands the fastest in one year; touches 55.3

Services hit fast lane in February as Purchasing Managers’ Index (PMI) raced to 55.3 as against 52.8 of January. However, this did not translate into good news on the job front as employment declined from the third month in a row.

This is the fifth straight month of expansion. The service sector is the largest contributor to GDP with around 55 per cent share.

The latest reading of PMI pointed to the sharpest rate of expansion in output in one year, says IHS Markit, the economic research agency. It is the agency which prepares the index based on compilation of responses from questionnaires sent to a panel of around 400 services sector companies. A diffusion index is calculated for each survey variable. The indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease.

Commenting on the latest survey results, Pollyanna De Lima, Economics Associate Director at IHS Markit, said that the February PMI data showed a solid growth performance for the Indian services sector which, alongside a robust upturn in manufacturing production, pushed up the Composite Output PMI to a four-month high.

“Economic activity is generally expected to recover in the final quarter of fiscal year 2020/21 after coming out of technical recession in Q3, and the latest improvement in the PMI indicators points to a strong expansion in the fourth quarter should growth momentum be sustained in March,” she said.

The survey covers sectors such as consumer (excluding retail), transport, information, communication, finance, insurance, real estate and business services. Latest data shows transport & storage was the best-performing segment. At the same time Information & Communication was the only sub-sector to post contraction in sales and business activity in the latest month. Companies in this category also bucked the general trend of positive growth projections and signalled a neutral outlook for output.

According to De Lima, again, inflation remains a topic of concern. Input costs across the private sector rose to the greatest extent in over seven years, but companies were reluctant to lift output charges due to competitive pressures and efforts to secure new work. Once firms’ additional cost burdens start to feed through to clients via price hikes, demand strength may come under pressure.

“There were further job losses across both the manufacturing and service sectors, which also could restrict domestic consumption in the coming months. However, with capacity pressures mounting, business sentiment strengthening and the vaccination programme widening, it seems that the best days are ahead of us regarding employment growth,” she said.

The survey found that despite ongoing growth of total new business, service sector employment fell further during February. A number of companies suggested that the COVID-19 pandemic restricted labour supply. The pace of job shedding accelerated from January, but was moderate overall.