It’s not just the manufacturing sector that has started to expand globally—the services sector, too, is expanding. The JPMorgan Global Services Business Activity Index was at 50.5 in August, the first expansion in 15 months.
In India, the new services purchasing managers’ index (PMI), sponsored by HSBC Holdings Plc, showed a reading of 54.9 in August. That’s higher than the manufacturing PMI of 53.2, implying the services sector is recovering more rapidly than manufacturing. But we need to be cautious about that conclusion, because one of the components of the index is the business expectations sub-index, which has jumped sharply to 73.1. Optimism may be too high. The gross domestic product (GDP) data for the first quarter of 2009-10 showed that the overall growth rate for the services sector was lower than in the two preceding quarters.
With services accounting for the bulk of GDP in India, the continued expansion in services, especially the rise in the employment sub-index, is good news. Interestingly, the global services input prices sub-index rose to an 11-month high of 56.4 in August, up from 44.4 in July. This was the biggest jump in the history of the sub-index and reflects a rise in cost pressures in the services sector.
With both the global manufacturing and services PMI data going above 50, the composite JPMorgan Global All-Industry Output Index stood at 52.1 in August, the first time it has gone above the neutral 50 mark since May 2008. The global economy is finally expanding again.
Can the expansion turn into a “double-dip”? A recent Citigroup Inc. note pointed out that “global equities rallied strongly (40%-plus) post the 9/11 lows in 2001 as leading indicators pointed at economic recovery... The global economy subsequently slowed over this period. This was enough for equity investors to take fright again. Global equities fell 35% from their March 2002 high to their March 2003 lows.” Could this happen again? It could, if governments and central banks decide to tighten prematurely. As investment research firm BCA Research warns, “Prematurely exiting from an accommodative policy setting derailed the recovery in the late 1930s and led to another leg of the depression.” In India, with its high fiscal deficit, failed monsoons and high food prices, recovery will be an uphill task.
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