2Q records 2.6% growth on floods and policy inconsistency

Sri Lanka’s 2Q grew by only 2.6% compared with 5.5% in 1Q due to floods and inconsistent policy making, official data showed, with agriculture, industries and construction dragging down growth.

According to the latest data released by the Census and Statistics Department, the agricultural sector contracted 5.6% in the second quarter, compared to growth of 0.7% in the previous quarter. This was largely attributed to devastating floods that hit Sri Lanka in May. Analysts also attributed the lacklustre second quarter showing to a higher base in 2015 when the economy grew by an impressive 7%.  

“Floods and weather impacts have dragged down agriculture while there is a base effect as well as the last year’s second quarter growth was quite high,” Shiran Fernando, an analyst at Colombo-based Frontier Research had told Reuters.  The industrial sector grew at 2.2% in the second quarter, slowing from a 7.8% expansion in the first quarter. Construction, a main contributor to growth in Sri Lanka, expanded at 6.9% in the second quarter, down from 12% in the previous three months.

The Central Bank, which predicts Gross Domestic Product (GDP) growth of 5% in 2016, has tightened monetary policy three times since December to reign stubbornly high credit growth.  In the first half of 2016, the Sri Lankan economy grew 3.9% year-on-year, the data showed. 

“A growth of 5% for the full year will be challenging with adjustments in the economy like interest rates hikes and depreciation. Higher tax will also drag down the investments and likely to stall the growth,” Fernando said. 

Industry and services meanwhile maintained robust growth making up 26.6% and 55.8% respectively of overall growth. 

“During the second quarter of 2016, especially the services activities have recorded a significant growth rate of 4.9% compared to the second quarter of 2015. Industrial activities reported growth rate of 2.2%. However, the agricultural activities have reported 5.6% of negative growth rate,” the Census and Statistics Department said. 

Rice and tea growth dropped by 17.9% and 12.2% during the period, the department observed. 

Among the three major activities, the services activities which gave the highest contribution to the GDP growth, recorded a positive growth rate of 4.9% during the second quarter of 2016, compared to the same quarter in the year 2015. 

“The performance of services sector was underpinned specially by the sub activities of ‘Telecommunication’, ‘Financial service activities’, ‘Insurance activities’, ‘Education service’ and ‘Wholesale and retail trade’ which reported significantly higher growth rate of 21.2%, 14.5%, 15.1 %, 10.5% and 3.5% respectively compared to the respective quarter in the year 2015,” the department said.

Purchasing Managers’ Index rises

Sri Lanka’s Purchasing Managers Index for both the manufacturing and services sectors increased in August with indications of continued growth, the Central Bank said in a short statement. 

The full statement is given below:

The Manufacturing Sector PMI increased to 53.5 in August which is an increase of 2.9 index points from 50.6 in July 2016. 

The increase in August was fuelled by the improvements observed in New Orders, Employment and Production Indices. All the sub-indices of manufacturing sector PMI, apart from stock of purchases which was unchanged, increased compared to the previous month. 

Notably, New Orders, Employment and Suppliers’ Delivery Time indices recovered from the contraction observed in July. Overall data points to an expansion where all the sub-indices are above the neutral 50.0 threshold. The expectations for activities indicate an improvement for the next three months.

The Services Sector PMI increased to 61.2 in August from 57.8 in July 2016. The increase in PMI over the last month’s value indicates that economic activities in the services sector expanded at a higher rate in August 2016 compared to the previous month. The increase in Services PMI was underpinned by increases in New Businesses, Business Activity, Employment and Expectations for 

Activity sub-indices. Backlogs of Work declined in August compared to the previous month. Decline in Backlogs of Work amidst rising New Businesses and Business Activity indicates increasing efficiency levels within the services sector and freeing up of capacity for elevated Expectation for Activity. 

Prices Charged index, which is not taken into consideration in PMI compilation process, increased in August 2016 after two consecutive declines from its peak level in May 2016.