Services PMI makes surprise decline in February

• But businesses hopeful of economic recovery

The Purchasing Managers’ Index (PMI) for both manufacturing and services contracted in February, with the latter flipping into the negative territory for the first time in six months but the expectation for future business grew on the back of stability hopes and upcoming festive season.

The PMI for manufacturing activities recorded an index value of 42.3 for February, a slight improvement from 40.8 index points in January. 

An index value of 50.0 separates activity between an expansion and a contraction. 

Manufacturing has been contracting since April last year, as Sri Lanka ran out of foreign currency, firing runaway inflation. The Central Bank raised interest rates by a record amount to crush demand and thereby tame inflation, which was getting out of control. 

Almost a year later, the manufacturers are still plagued with the declining demand, mainly due to the deterioration in the purchasing power of the consumers. 

“The decline in new orders and production was mainly driven by subdued demand observed in the manufacture of food and beverages and textile and wearing apparel sectors,” the Central Bank said.

“However, they expect demand to increase on a month-on-month basis, targeting the festive season in April,” it added. Besides the demand-side squeeze, the manufacturing sector has once again been pushed up against the wall by the latest round of electricity tariff hike. 

The manufacturers are maintaining material stocks at the minimum levels, considering the subdued demand conditions and declining global commodities prices, freight and exchange rate. 

Meanwhile, the service sector PMI made a surprise turn from expanding to a contraction in February, as the index value came in at 48.7 index points, from 50.2 index points in January. 

This has been prompted by the decline in new business in transportation, insurance and postal and courier sub-sectors. The business activities in the wholesale and retail sub-sectors continued to deteriorate amid subdued demand conditions, driven by the diminishing purchasing power of the consumers. The transport sub-sector continued to decline, due to the drop in freight volumes and weaker imports and exports, which showed some cracks in recent times. 

However, the financial sector continued to do well, due to the improvement in deposits, the Central Bank said.
Both the manufacturing and services sector stakeholders are hopeful of the upcoming New Year festive season and also the signs that the economy is turning a corner, with the prospects of the deal with the International Monetary Fund coming through this month.