SERVICES SECTOR GROWTH FALLS FROM 21-MONTH PEAK

Services PMI slid from 21-month high of 54.2 in July; in last 12 months, sector contracted four times

Growth in services activity fell in August as the number of new businesses rose at a slower pace and export orders dropped, according to the Nikkei India Services Purchasing Managers’ Index (PMI) numbers released on Wednesday. Services PMI slid to 51.5 in August, from a 21-month peak of 54.2 in July. The 50-point mark separates expansion from contraction.

Growth in services activity fell in August as new business rose at a slower pace and export orders dropped, according to the widelytracked Nikkei India Services Purchasing Managers’ Index (PMI) numbers released on Wednesday.

Services PMI slid to 51.5 in August, from the 21-month peak of 54.2 in July. The 50-point mark separates expansion from contraction. The sector has continued to remain volatile. In the 12 months to August, the sector contracted four times in the PMI measure.

Services activity had contracted in May as rising price pressure led to a decline in new business orders. However, the sector continued to grow thereafter, until the sudden drop in growth prospects in August. As a result, activity in the sector saw its slowest pace of growth in three months.

The sudden slowdown in services follows a similar downturn in the manufacturing sector as well as a result of muted domestic demand and weak overseas orders. Earlier this week, manufacturing PMI fell to a three-month low of 51.7 in August, from July’s 52.3.

These figures have led to economists paring back their forecast for gross domestic product (GDP) growth in the second quarter of the current financial year (2018-19 or FY19). GDP figures released last week showed the economy expanded 8.2 per cent in the AprilJune quarter, its fastest pace in more than two years, driven by solid manufacturing growth.

In services, new businesses continued to rise for the sixth consecutive month. But despite new client wins, the rate of expansion for incoming business slowed from July’s 13-month high.

Strong demand conditions led to Indian service providers continuing to raise their payroll numbers in August. The current trend of rising employment in the sector has been constant since last September. As was the case with activity and new work, information and communications registered the fastest growth.

As has been the case since September 2016, input prices faced by Indian service providers rose during August. Moreover, the rate of increase was the strongest since last November. Stronger inflationary pressures stemmed from higher oilrelated prices, according to panellists. In the manufacturing sector, input cost inflation moderated to the slowest since May but remained sharp overall. Panellists reported that currency weakness led to higher raw material costs.

“Input cost inflation in the services sector accelerated to the sharpest since November 2017, fuelled by higher oil-related prices. Meanwhile, firms faced pressure on their margins as they were unable to fully pass on higher cost burdens to price-sensitive customers,” Aashna Dodhia, economist at IHS Markit and author of the report, said. Services companies raised their average selling prices at a marginal pace that was close to July’s 16-month low. Latest survey data suggested that firms were restricted in their ability to fully pass on higher cost burdens to clients due to competitive conditions, Markit Economics said.

Business sentiment towards the 12month outlook strengthened to a three-month high, with stronger confidence seen among service providers.

The Nikkei India Composite PMI Output Index, which maps both the manufacturing and services sectors, managed to rise, in keeping with a marginal increase in overall output. It fell from 54.1 in July to 51.9 in August.

The current falling trends have been attributed to global knock-on effects. A similar survey in China showed activity in the Chinese services sector grew at the slowest pace in 10 months in August.

The Caixin China services purchasing managers' index slipped to 51.5 in August, from 52.8 in July. On the other hand, the Caixin China General Manufacturing PMI had fallen to a 14-month low of 50.6 in August, from 50.8 in the previous month.