14 September 2015 11:54:39 IST

Amidst manufacturing gloom, services shine

The services sector is growing at a healthy pace in many large economies

Manufacturing activity is in reverse gear in many of the world’s largest economies — the slowing Chinese economy is a case in point. In the US and the UK, the pace of growth has tapered compared with a year ago.

On the contrary, the services sector is growing across the world’s leading economies. This dichotomy is corroborated by the Purchasing Managers’ Index (PMI) data, compiled by Markit, a global financial information service provider.

While the manufacturing PMI for many economies is hovering under 50, the services PMI for all, except Russia and Brazil, is over 50. The Index has been well over 50 for the US, the UK, the Euro Zone and Germany for several months at a stretch.

A monthly lead indicator, the PMI throws light on how an economy is expected to perform near-term. A reading over 50 indicates expansion, while one under points to contraction, in comparison with the previous month.

Serving well So, what is helping the services sector outdo manufacturing? According to Robert Subbaraman, Managing Director, Chief Economist and Head of global markets research, Asia ex-Japan, at Nomura, globally companies have not stepped up investment.

“Since services are less capital intensive than manufacturing, they have remained relatively immune to the slowdown in investment. Also, of late, growth has been weaker in emerging economies, thus hurting manufacturing.

“The developed economies, on the other hand, are more services-driven. Among the most prominent of these is the financial services sector which tends to benefit from a low interest rate environment globally (as is currently the case). This should continue to support services in the near future too,” he said.

All-round growth Developed economies have significantly benefited from a strong services sector in recent times. In the US, the Services PMI in August 2015 stood at 56.1. This marked 22 straight months of growth for the sector, which accounts for 90 per cent of the country’s GDP. After expanding for the 25{+t}{+h} month in a row, the Services PMI reading for the Euro Zone came in at a healthy 54.4 in August.

“Here, traction can be seen in transport, communication, finance and insurance,” says Shubhada Rao, Chief Economist, YES Bank.

In Japan, at 53.7, the August Services PMI signalled a significant improvement . “Indicators such as bank loan growth, housing data and retail sales too point towards improvement. Anecdotal evidence suggests that medical and social welfare services too have shown an increase,” says Rao. In China, too, services have been registering growth.

It’s different The PMI data for India, however, show a slightly different trend. Unlike in most major economies, the August Services PMI for India at 51.8 was a tad lower than the Manufacturing PMI of 52.3. This has been the pattern in the past too.

“A large part of the outperformance of the Manufacturing PMI over the Services PMI has been because of the slump in prices of global commodities, which are used as inputs in manufacturing. So, even as input prices for services have moderated, the degree of downward adjustment has been relatively smaller in services,” explains Rao.