PMI Services for July improves, but severe weaknesses remain

Our Bureau New Delhi | Updated on August 05, 2020

Any substantial recovery will take months, if nor years, says Lewis Cooper, Economist at IHS Markit, which conducted the survey

The Purchasing Managers’ Index (PMI) improved a tad to 34.2 in July from 33.7 of June. However, weaknesses remain in the sector mainly due to local lockdowns.

The performance of the services sector is critical to gauge the economic situation as it has a share of nearly 57 per cent in the Gross Domestic Product (GDP), which is the maximum among all three sectors — Services, Industry and Agriculture.

India’s Services PMI is compiled by economic research agency IHS Markit from responses to questionnaires sent to a panel of around 400 service sector companies. The sectors covered include consumer (excluding retail), transport, information, communication, finance, insurance, real estate and business services. Survey responses are collected in the second half of each month and indicate the direction of change compared to the previous month. A diffusion index is calculated for each survey variable. The indices vary between 0 and 100, with a reading of above 50 indicating an overall increase, compared to the previous month, and below 50 an overall decrease.

Commenting on the latest survey results, Lewis Cooper, Economist at IHS Markit, said that the coronavirus pandemic and subsequent introduction of ‘lockdown’ measures continued to weigh heavily on the Indian services sector in July. Business activity and new orders dropped again, with the rates of decline remaining rapid overall. Panellists frequently reported temporary company closures and weak demand as a result of the pandemic.

With demand severely restricted, July data highlighted another round of job cuts, with the latest reduction the most marked on record, while firms’ output expectations in the year ahead remained pessimistic. July data, as a whole, provide no real signs that the downturn is slowing down. That’s not surprising with lockdown measures still in force, but undoubtedly these will have to be loosened and companies reopen before the sector can move towards stabilisation.

“With such a prolonged and significant downturn, any substantial recovery will take many months, if not years. Latest IHS Markit estimates point to an annual contraction in GDP of over 6 per cent in the year ending March 2021,” he said.

The survey report said with overall demand conditions severely muted, service providers made further job cuts in July. The rate of job shedding was the fastest on record, with panellists blaming weak client demand and temporary business closures. With capacity being restricted further, firms struggled to process backlogs in July. The level of outstanding business rose again, with the rate of expansion the quickest since October 2017.

Services firms remained pessimistic with regard to activity over the year ahead for a third consecutive month in July, with the proportion of survey respondents expecting a decline in activity levels outweighing those anticipating a rise. The negative sentiment was linked to substantial uncertainty, lockdown measures and expectations of a severe economic recession. On the price front, input costs increased for the first time since March amid reports of greater fuel and cargo costs alongside higher fees charged by suppliers.

Published on August 05, 2020

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