Services sector PMI in December slows to 3-month low of 55.5 as Omicron bites

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Indian services companies continued to report growth of sales and business activity in December, albeit at a slower pace due to the spreading Omicron variant of COVID-19.

According to the monthly IHS Markit India Services Purchasing Managers’ Index (PMI) survey released on January 5, services PMI stood at 55.5, down from 58.1 in November. In PMI parlance, a print above 50 means expansion, while a score below that denotes contraction.

Services PMI had been on an upswing over the past few months, scaling a ten and a half year high of 58.4 in October, up from 55.2 in September. But the latest rise in travel restrictions and curfews, market closure in the domestic sector due to the spreading Omicron variant has dampened services activity.

According to the PMI survey, new work intakes by services firms continued at a slower pace. The rise was the fifth in successive months and marked, but softened to a three-month low. Also, this was centered on the domestic market, as new business from abroad fell further. The deterioration in international demand was linked to COVID-19 restrictions, particularly around travelling.

Instead, Indian services companies continued to clear their outstanding business at the end of 2021, with the latest fall in outstanding work being the fifth in consecutive months.

The incessant rise in inflation also continued to pose another challenge for Indian services providers. December data highlighted an eighteenth successive monthly increase in input costs at Indian services firms. Although sharp and above its long-run average, the rate of inflation softened to a three-month low. Monitored companies cited higher costs of chemicals, food, fuel, medical equipment, office products, tools and transportation

"2021 was another bumpy year for service providers and growth took a modest step back in December. Still, the latest readings pointed to robust increases in sales and business activity compared to the survey trend," Pollyanna De Lima, Economics Associate Director at IHS Markit said.

Moreover, owing to the buoyant performances seen in October and November, the average growth rate for output over the third quarter of fiscal year 2021/22 was the strongest since the three months to March 2011, she added.

Job losses

December data showed renewed job shedding in the service economy, but the rate of contraction was only slight. While the vast majority of surveyed companies (96 percent) left payroll numbers unchanged from November, the latest data will come as a worry to policymakers.

The number of jobs in the sector had gone up from September onwards, after a nine-month period.

Services firms were generally confident that output would increase in 2022, but fears of new COVID-19 waves and price pressures somewhat hindered optimism. Business confidence strengthened during December, to a four-month high despite uncertainties.