Service activity continues to contract in May due to lockdown, PMI at 12.6

Job losses across services sector continue as foreign orders remain missing

Services sector activity contracted for the second straight month in May as the nationwide lockdown led to a collapse in demand, causing heavy job losses, showed a monthly survey released on Wednesday.

The IHS Markit Services Business Activity Index (Services PMI) stood at 12.6 in May, up from 5.4 in April, which was the lowest reading in the world. In PMI parlance, the 50-mark threshold separates expansion from contraction.

In May, output sank due to extended business shutdowns and weak demand. The latest data points to a substantial decline in new work intake by Indian service providers. 

This was blamed on the collapse of new business from overseas markets, with around 95 per cent of services companies reporting a fall in foreign demand.

However, the survey noted this was still better than April when exports fell to zero as measures to stem the spread of the coronavirus overseas caused demand to fall across all key export markets.

As a result, lay-offs took place across the sector at a high pace, but marginally slower than in April. However, in the previous month, 90 per cent of companies had reported unchanged workforce numbers suggesting that job shedding remained concentrated in a few segments of the services economy.

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.

With many businesses continuing to remain shut during May, spare capacity grew slower as a number of firms reported a build-up in unfinished work due to idle operations. Nevertheless, backlog of work declined overall.

However, experts say the outlook remains optimistic. “With economic output set to fall enormously in the first half of 2020, it is clear that the recovery to pre-Covid levels of GDP is going to be very slow,” said Joe Hayes, economist at IHS Markit. This was echoed by other experts.

The firms, though, remained despondent. Output expectations for the coming 12 months slumped to their most negative since records began in December 2005, amid forecasts of a prolonged economic weakness domestically and overseas. 

Lastly, prices data showed deflationary trends across both input costs and output charges midway through the second quarter. However, while the rate at which output price fell slowed, operating expenses dropped at the fastest rate in the survey’s history. 

Earlier this week, a similar survey showed that manufacturing activity had contracted at the highest pace in over 15 years. Manufacturing PMI stood at just 30.8 in May, showing sharp deterioration in business conditions across the sector.

With both domestic demand and export orders falling at a high pace, new businesses collapsed at a record speed and led to major job losses across the manufacturing sector in India.

The seasonally adjusted IHS Markit Composite PMI Output Index, which calculates growth after considering manufacturing and services indices relative to the size of the country’s gross domestic product, rose to 14.8 from a record low of 7.2 in April, signalling a serious slowdown in overall private sector output growth.