Services PMI rises to 7-year high at 55.5 in January

The services sector started 2020 on a strong footing with the IHS Markit India Services Business Activity Index coming in at 55.5 in January 2020, up from 53.3 in December 2019. This signalled the strongest upturn in output for seven years.

Surging demand underpinned the fastest increase in new orders and output for seven years. As a result, job creation was sustained and business optimism maintained, the latest IHS Markit Services PMI showed.

The Composite PMI Output Index increased from 53.7 in December to a seven-year high of 56.3 in January. January data showed that growth of private sector activity moved up a gear, amid broad based accelerations across manufacturing and services.

The main factor boosting growth was a sudden wave of new business. Aggregate sales rose at the sharpest pace since January 2013, with quicker increases evident at goods producers and service providers, according to IHS Markit.

Reuters adds:

“The Indian service sector sprung to life at the start of 2020, defying expectations of fragility and building on to the momentum gained at the end of 2019,” Pollyanna De Lima, principal economist at IHS Markit, said in a release. “With business revenues rising, service providers continued to increase capacity to meet further strong growth in sales. This is good news for jobseekers, particularly when we consider the results from the manufacturing industry which showed the steepest upturn in employment since August 2012.”

A sub-index tracking new business also climbed to its highest since January 2013, encouraging firms to maintain a strong hiring rate.

Yet, not everything was rosy. New export business - a proxy of foreign demand - contracted last month, falling to its lowest since May 2018 on weaker demand from China, the United States and Europe. Pressure could heighten further amid growing global risks from China's coronavirus epidemic which has rapidly spread to other countries and claimed nearly 500 lives, nearly all in mainland China.

Moreover, prices charged by service firms increased at the fastest pace in nearly two years after a sharper rise in input costs forced businesses to transfer some of the inflationary pressure to consumers. This suggests overall inflation could remain above the Reserve Bank of India's medium-term target of 4 per cent, making it difficult for the central bank to ease monetary policy further.

“One worrying development, however, was the trend for inflation. This may translate into quicker increases in selling prices in months to come, which may curb sales,” De Lima said. “Firms could also choose to restrict hiring in order to protect profit margins.”

Service providers remained optimistic about growth in the year ahead, although the expectations index remained well below the long-term average.

Another survey on Monday showed factory activity accelerated at the fastest pace in eight years last month which, along with the strong expansion in services activity, pushed a composite index to 56.3, its highest since January 2013.

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