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Services sector succumbs to the global financial downturn

Services sector succumbs to the global financial downturn
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First Published: Sun, Mar 08 2009. 09 13 PM IST

Updated: Sun, Mar 08 2009. 09 13 PM IST
A new concern reared its ugly head for the global economy last month. The services sector, which had shown some signs of resilience from the worldwide slump, contracted at a more rapid rate than in January. That’s the conclusion from the JPMorgan Global Services Purchasing Managers’ Index (PMI), which fell to 39.8 in February, down from 43 in the previous month. A reading below 50 signals a contraction from the preceding month. What’s more, the global services PMI for February is just a tad above that for December, when it was at 39.6. The new business sub-index also contracted at a rapid pace, which doesn’t hold out hopes of an early turnaround.
 The downturn in services raises two important questions for India. One, it implies that the information technology (IT) services and business process outsourcing (BPO) sectors, too, are shrinking rapidly. Two, it could mean that countries with a higher proportion of services in their economies, such as India, will also be hurt badly. One silver lining in India’s fourth quarter gross domestic product (GDP) numbers was the buoyancy of its services sector. The global data suggest that was probably temporary.
Also See Trend Reversal (Graphic)
The global manufacturing PMI showed that the manufacturing sector continued to shrink in February, albeit at a slightly reduced pace. The manufacturing PMI was at 35.8 in February against 35 in January. The rate of decline for new orders eased, but it was still very low at 31.3. A rise in the index for China—perhaps the result of its fiscal stimulus—was probably the main reason.
The upshot of all this was that the JPMorgan Global All-Industry Output Index, which combines both manufacturing and services, saw a decline to 38.4 from 40.3 in January. This composite index had reached a nadir of 35.5 last November, before bouncing back in the next two months. The February decline is a reversal of trend.
Simply put, far from reaching a bottom, which will only happen when the index reaches 50 (which indicates neither expansion nor contraction), the global economy continued to decline in February, and what’s more depressing is that its rate of decline accelerated during the month. 
 The composite leading indicators (CLIs)  of the Organization of Economic Co-operation and Development (OECD) also touched new lows in January.
The CLIs are supposed to predict turning points in economic activity at least six months in advance—by that measure, there is no chance of any turnaround in either the global or the Indian economy in the next six months.
The CLI for India was at 92.4 in January, down from 93.4 in December. The indicator shows the slowdown became worse in January, not only for India, but for all the countries tracked by the OECD CLIs. OECD says there is “little clear indication of stabilization soon”.
What is scary is that this is happening in spite of rock bottom interest rates, in spite of massive capital injections in banks, insurance companies and housing finance companies in the West and despite injecting huge amounts of liquidity into the global economy. Small wonder the markets are deep in despair.
Graphics by Paras Jain / Mint
Write to us at marktomarket@livemint.com
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First Published: Sun, Mar 08 2009. 09 13 PM IST