Services sector continues to hold back global recovery

Services sector continues to hold back global recovery
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First Published: Fri, Aug 07 2009. 11 18 PM IST

Updated: Fri, Aug 07 2009. 11 18 PM IST
Yet another signal the market may have gone a bit ahead of the economy comes from the global data on services growth last month. The JPMorgan Global Services Purchasing Managers’ Index (PMI) fell to 46.5 in July from 47.4 in June. A reading below 50 denotes contraction.
This indicates the global services sector not only continued to contract but did so at a faster rate than in June. That’s an unpleasant surprise, coming so soon after the encouraging global manufacturing PMI, which shows that contraction has finally stopped for the first time since May last year.
The services sector forms the largest part of the developed economies and the data shows the road to recovery is going to be rocky.
The only piece of good news from the services PMI is that the Global Services New Businesses index rose for the second month running to its highest level since September last year. But at 46.7, it continues to indicate that new service business is contracting, although at a slower rate.
The upshot is the JPMorgan Global All-Industry Output index, which combines the manufacturing and services PMI, hardly budged in July, moving up to 48.2 from 48.1 in June.
While that shows the global economy continued to contract in July, it also indicates that manufacturing is far stronger than services. That gives credence to the view that the rise in manufacturing is led by a rebuilding of inventories.
Sandeep Bhatnagar / Mint
Firms had cut back sharply on inventories during the panic and are now busy restocking.
A note by Danske Bank AS points out: “The dramatic extent of production cutbacks can be explained by the need to reduce inventories—and reduce them fast—to free up liquidity. As inventories are lean in most sectors and current production is way below demand, there is only one way companies can meet demand: they have to raise production.”
The other inference from the global services data is that while the recovery in a manufacturing economy such as China is strong, it’s weak in the services-led developed economies.
Since India doesn’t publish a services PMI, we don’t really know the current trend, but GDP data has shown that services growth in India has been far more robust than manufacturing.
This dichotomy will further underline the difference between the struggling economies of the West and the stronger Asian economies. Interestingly, the Hong Kong Services PMI returned to growth following a year-long decline.
The continuing weakness in the Western world will mean that even more money will be thrown at the problem—witness the Bank of England’s decision to pump in an extra $84 billion (Rs4.02 trillion) into the economy through bond purchases.
It means even more liquidity and more fuel for the markets.
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First Published: Fri, Aug 07 2009. 11 18 PM IST