Services PMI: the worst may be over, but the best is nowhere

A reading above 50 indicates expansion and below this range indicates contraction.

“The intensity of the pandemic was reportedly accelerated by the resumption of restrictions and inflationary pressures,” the PMI survey report said.

The good thing is that unlike the last two waves, this time the impact of the pandemic has not been as severe. “The complete PMI data for January confirms that the direct impact of the omicron wave and related sanctions was quite modest compared to previous outbreaks,” said Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, in his note on February 3.

Furthermore, India’s third wave is said to be declining with a sharp drop in new infections. Chanko points out that the number of virus cases fell by more than 40% at the end of January, and mobility data from Google shows that trips to retail and entertainment venues have turned a corner.

“More importantly, it is probably the worst of the services PMI has to offer,” he said.

That said, inflation remains a concern. The PMI sub-index for inflation has risen to the highest level since December 2011. Higher food, fuel, material, employee and transportation costs pushed the overall rate of inflation to a decade high. According to the PMI report, the service providers have increased the prices, but this is not enough to compensate for such a sharp increase.

Economists say that in the backdrop of increased inflation, service providers may not be able to make a meaningful return anytime soon.

“In the near term, the outlook for the Indian services sector may improve as restrictions are eased. Given stagnant demand, customers may be willing to pay a higher price. However, this is likely to be a short-term phenomenon. “Eventually, inflation will start troubling customers, leading to slower growth in the services sector, with small and sectoral companies facing more losses than large companies,” said Madan Sabnavis, chief economist, Bank of Baroda.

It is no surprise that business confidence among Indian service providers has once again hit a six-month low, the PMI survey shows.