Service sector expansion slows down in December, PMI at 52.3

Services hit the slow lane in December as the Purchasing Managers’ Index (PMI) slipped to 52.3 as against 53.7 in November. Adding to the gloom was the news that employment had contracted.

The service sector, with around 55 per cent share, is the largest contributor to GDP.

The latest PMI reading points to the slow pace of expansion in the last two months of the year, according to IHS Markit, the economic research agency that prepares the index based on responses to questionnaires sent to a panel of around 400 service 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 a number below 50 pointing to an overall decrease.

Commenting on the latest survey results, Pollyanna De Lima, Economics Associate Director at IHS Markit, said the slowdown is particularly notable given the size of the sector, the fact that the recovery only began in October and that monthly rates of increase in new business and output were moderate relative to those seen in the manufacturing industry.

Covid-19, key restricting factor

A spike in Covid-19 cases was reported as a key factor restricting growth of new work intakes among service providers, which in turn curbed the rise in output and led to increased business uncertainty about the outlook. Given the damaging impact of the pandemic on the service economy, some companies are facing financial difficulties, which is affecting hiring. December saw the ninth round of job shedding in 10 months.

To add to the testing conditions, expenses of services firms continued to rise while their pricing power diminished. Input prices rose at the sharpest rate in 10 months during December, but firms absorbed the increase in cost burdens amid efforts to stimulate demand. "It is clear that the early part of 2021 will continue to be challenging, but we're looking at a sustainable recovery and a return to normality once Covid-19 vaccines become available,” she said.

The report highlighted that job shedding resumed in December, with some firms mentioning that liquidity problems, labour shortages and subdued demand had caused the latest fall in employment. “The decline in payroll numbers was the ninth in 10 months, but was marginal overall,” it said.

Another worrying factor is cost. The report said input costs had increased to the greatest extent since February. Survey participants reported higher prices for a number of items, including cleaning products and fuel. Despite the intensification of cost inflationary pressures, December data showed a renewed reduction in prices charged for the provision of services in India. “Companies that offered discounts mentioned attempts to beat competition and stimulate demand,” it said.

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