Covid-19 impact: Services PMI rises but fails to break out of contraction

Downturn grips sector as job loss, low export orders and poor domestic demand distress companies

Services sector activity contracted for the fifth straight month in July as restrictions to contain the Covid-19 pandemic destroyed demand in both the domestic and foreign markets, showed a monthly survey released on Wednesday.

The IHS Markit Services Business Activity Index (Services PMI) registered an increase in July, but remained contractionary at 34.2, against 33.7 in June.

In PMI parlance, the 50 mark threshold separates expansion from contraction. While Services PMI had been on a steady rise over the past three months, the pace has slackened recently. It was 12.6 in May and just 5.4 in April.

“The latest reading was among the lowest recorded in nearly 15 years of data collection, surpassed only by the unprecedented falls in the previous three months,” the survey pointed out.

New orders fell sharply during the latest month, which firms attributed to reduced consumption habits and lower requirements at key clients. While domestic demand remain soft, export orders also continued to fall. The latest decline in new export orders was steeper than that for total new business, but the least severe since March, the survey pointed out.

As a result, layoffs continued to take place across the sector at a high pace. The rate of job shedding was the fastest on record, with companies blaming weak client demand and temporary business closures, the survey said.

Before the lockdown, experts had high hopes for the services sector, which scaled an 85-month high in February with rising new orders from overseas markets creating stable growth. But job growth had stagnated in recent months with the number of jobs created falling to a three-month low even during February’s boom period.

However, in July, there were signs of capacity pressures building up again as firms struggled to process backlogs in July. The level of outstanding business rose again, with the rate of expansion the quickest since October 2017.

As conditions continued to deteriorate in June, surveyed companies became more pessimistic towards their prospects over the coming 12 months. Business confidence slid to a survey low and also pointed to strongly negative expectations towards activity levels in the year ahead.

Negative sentiment was most commonly linked to substantial uncertainty, lockdown measures and the very real expectations of a severe economic recession.

Lastly, prices data showed input costs increased for the first time since March amid reports of greater fuel and cargo costs alongside higher fee charged by suppliers. 

On the other hand, fierce competition for the relatively little new work available continued to put downward pressure on selling prices. Average charges levied by Indian services firms fell for the fourth consecutive month, with the rate of deflation accelerating to a solid pace.

Earlier this week, a similar survey showed that manufacturing activity continued to contract for the fourth straight month in July as regional lockdown extensions severely held back demand and labour, logistic challenges remained strong.

Manufacturing PMI stood at 46 in July, down from 47.2 in June. PMI had fallen to a historic low of 27.4 in April, but had been steadily climbing up since.