Economic slowdown. Manufacturing PMI dipped to 48.1 in June, contraction for the first time after July 2020

Second wave of the pandemic coupled with local lockdowns have pushed manufacturing activities in reverse gear as Purchasing Managers’ Index (PMI) for June dipped to 48.1. Loss of employment has continued.

The index, as prepared by IHS Markit, touched below the critical no-change mark of 50 for the first time since July 2020. “The latest reading pointed to a renewed deterioration in the health of the sector that was, however, moderate,” the agency said. 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.

“The intensification of the Covid-19 crisis in India had a detrimental impact on the manufacturing economy. Growth of new orders, production, exports and input purchasing was interrupted in June as containment measures aimed at bringing the pandemic under control restrained demand. In all cases, however, rates of contraction were softer than during the first lockdown,” Pollyanna De Lima, Economics Associate Director at IHS Markit said

PMI estimation

PMI data is released monthly in advance of comparable official economic data. It is is compiled from responses to questionnaires sent to purchasing managers in a panel of around 400 manufacturers. A diffusion index is calculated for each survey variable. The index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘unchanged’ responses. The headline PMI is a weighted average of the following five indices: New Orders (30 per cent), Output (25 per cent), Employment (20 per cent), Suppliers’ Delivery Times (15 per cent) and Stocks of Purchases (10 per cent).

According to ISH Markit, demand weakness and a reduction in production requirements led firms to restrict input purchasing in June. Buying levels fell at a marked pace that was among the fastest seen since business confidence was dampened in June by uncertainty over when the pandemic can be brought under control. Companies were at their least optimistic for almost a year. “As a result, jobs continued to be shed midway through the year. The fall in employment was marginal but took the current sequence of month-on-month contraction to 15 months,” it said.

It also mentioned that falling new orders, business closures and the Covid-19 crisis triggered a reduction in output among Indian manufacturers. The decline was moderate, relative to those seen in the first half of 2020 but ended a ten-month sequence of growth.

De Lima said that companies became increasingly worried about when the pandemic will end, which resulted in downward revisions to output growth projections. As a result of subdued optimism, jobs were shed again in June. The rate of input cost inflation was stable in June, matching that recorded in May and thereby remaining above its long-run average. Companies again linked increases to global shortages of raw materials.

“Out of the three broad areas of the manufacturing sector monitored by the survey, capital goods was the worst affected area in June. Output here declined at a steep rate due to a sharp fall in sales. The sector also saw the fastest contraction in buying levels and was the only to post job shedding,” she said.

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