Services PMI moderates to three month low in December amid Omicron fears

Data released by the analytics firm IHS Markit showed that the Purchasing Managers' Index (PMI) for services fell to 55.5 in December from 58.1 in November.

India’s services sector activity moderated to a three-month low in December as many states imposed night curfews ahead of the Christmas season to curb the spread of the Omicron variant of Covid-19.

Data released by analytics firm IHS Markit showed that the purchasing managers’ index (PMI) for services fell to 55.5 in December from 58.1 in November. A reading above 50 indicates expansion in economic activity and a number below that signals contraction. Manufacturing PMI for December had also declined to a three-month low, data released on Monday showed.

“Underlying data suggested that the latest increase in new orders was centred on the domestic market, as new business from abroad fell further. The deterioration in international demand was linked to Covid-19 curbs, particularly around travelling,” the data analytics firm said.

December data also showed renewed job shedding  but the rate of contraction was only marginal. “In fact, the vast majority of surveyed companies (96%) left payroll numbers unchanged from November. Firms generally suggested that employment levels were sufficient to cope with workloads,” it said.

Pollyanna De Lima, the Economics associate director at IHS Markit, said that 2021 was another bumpy year for services providers and growth took a modest step back in December. “Services firms were generally confident that output would increase in 2022, but fears of new Covid-19 waves and price pressures somewhat hindered optimism. Uncertainty surrounding the outlook, and a general lack of pressure on capacity, led to a renewed fall in employment during December. That said, the decline was marginal and a recovery is expected this year should demand for services remain favourable,” she said.

Services providers reported a further increase in expenses during December. “Anecdotal evidence highlighted higher prices for chemicals, food, fuel, medical equipment, office products, tools and transportation. Although sharp and above its long-run average, the overall rate of inflation softened to a three-month low,” the analytics firm said.

The spread of the Omicron variant is expected to adversely impact the contact-sensitive services sector more than the manufacturing sector. While manufacturing had mostly held up during the second wave of the pandemic earlier last year, services contracted in May, June, and July, according to the PMI data. During the first wave of the pandemic in 2020, a contraction in the services sector was sharper than in manufacturing, and took seven months to return to expansion territory.

Aditi Nayar, the chief economist at ICRA, said her early analysis suggested that the impact of an Omicron wave may be limited to one quarter in terms of the duration of the surge in fresh cases, as well as the economic impact, given the better preparedness of governments, the health care system and households. “However, there continues to be a lot of uncertainty around this. The impact on GDP growth will depend on the extent to which restrictions need to be extended across states in the coming weeks. As of now, we see a modest downside to our forecast of FY22 GDP expansion of 9%,” she said.

The World Bank and Moody’s have projected the Indian economy to grow at 8.3 per cent and 9.3 per cent, respectively. Last week, ICRA retained its 9 per cent growth forecast for FY22.