Services PMI recovers from contraction, climbs to 52.6 on jump in orders

PMI in services rose to 52.6 in June from 49.6 in May, despite high-cost inflation

A spurt in new clients even as orders from existing buyers surged meant that services sector activity in June expanded at the fastest pace in a year, showed the widely tracked Nikkei India Services Purchasing Managers’ Index (PMI).

Services PMI for June climbed to 52.6, recovering from the marginal contraction of 49.6 in May. The 50-point mark separates expansion from contraction. Despite the June data showing sustained growth in key parameters, the sector has remained volatile. In the 12 months to June, the sector contracted five times in the PMI measure.

Service activity had contracted in May for the first time in three months as rising price pressure led to a decline in new business orders. But in June, new orders boosted by strong underlying demand contributed to new client wins at the fastest pace in 12 months, according to the report by IHS Markit, compiler of the PMI survey.

In June, existing clients raised their share of orders at the fastest pace in 12 months even as the level of new business received by manufacturing companies rose at the fastest rate since last December in June. This sequence of uninterrupted growth over the last eight months has been attributed to strong market demand.

But despite an improvement in demand conditions, business sentiment across the sector dipped to the lowest since last October. This was mostly due to cost inflation rising. "Overall input costs rose at the strongest rate since July 2014, and amid a weak rupee and higher oil prices, inflation may remain elevated. Given these circumstances, the chances of further monetary policy tightening have heightened,” said Aashna Dodhia, economist at IHS Markit and author of the report.

However, staffing levels were raised across the sector in June. Despite being modest, job creation accelerated from May’s five-month low. The survey showed Information & Communications as the sub sector with the sharpest growth in staffing levels. But it was not enough to reduce backlog of work at these companies, which rose in June for the 25th straight month.

On the other hand, growth in the manufacturing sector touched a six-month high in June with PMI going up from 51.2 points in May to 53.1 in June. Owing to the June rise, overall PMI for manufacturing stood at 51.9 points in the first quarter of 2018-19 against 51.8 points in the fourth quarter of 2017-18. Even though making an overall modest impact, job creation in factories accelerated at its strongest pace in 2018 so far. On the price front, input cost inflation saw the sharpest rise since July 2014, while output charges went up at a stronger pace. Business confidence eased to the weakest since last October.

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 rose from 50.4 in February to 53.3. in June.