Manufacturing sector suffers contraction in September; more setbacks ahead

• Services limp to marginal growth but outlook improves though concerns remain over supply-side constraints and new and higher taxes

The manufacturing sector suffered a contraction in September whilst the services sector limped to marginal growth as per the Purchasing Managers Indices (PMI).

The index compiler, Central Bank, said yesterday the manufacturing PMI declined indicating a setback in manufacturing activities on a month-on-month basis.

Services PMI recorded an index value of 51.2 in September 2022 indicating a marginal expansion in the services sector driven by the increases observed in New Businesses, Business Activities and Expectations for Activity.

CBSL said the Manufacturing PMI recorded an index value of 42.6 in September 2022, with a decline of 7.0 index points from the previous month driven by the decreases in all the sub-indices, except Employment and Suppliers’ Delivery Time.

The decline in New Orders and Production was mainly attributable to the manufacture of food and beverages, and textiles and wearing apparel sectors. Many respondents representing manufacturing firms primarily catering to the domestic markets, including the manufacture of food and beverages, mentioned that the decline in demand was due to the deteriorating purchasing power of the consumers. 

Further, manufacturers in the export-oriented industries mentioned that they experienced a weaker demand mainly due to the fear of recession in the major export destinations. However, Employment is broadly at the level of the previous month, while an improvement seen in the manufacture of textile and apparel sector. As the apparel sector frequently suffers from the scarcity of employees, it has tended to recruit despite the gloomy outlook, taking advantage of the healthy influx.

The Stock of Purchases decreased in line with the decline in New Orders and Production while Suppliers’ Delivery Time lengthened slightly in September 2022. Some respondents mentioned that they continuously experience difficulties in sourcing raw materials due to lower foreign exchange availability, although some recent improvement has been witnessed.

For the next three months, the overall expectations for manufacturing activities deteriorated in September 2022, anticipating demand side impediments to be intensified in the coming months.

The Services PMI, the new businesses expanded in September 2022 compared to August 2022, particularly with the improvements observed in financial services, accommodation, food and beverage and education sub-sectors.

Business Activities in the services sector increased further during September amid the ease of the energy crisis and improvements in economic conditions. Accordingly, business activities related to financial services, other personal activities, education and insurance sub-sectors recorded improvements compared to the previous month. 

Nevertheless, business activities of real estate, postal and courier and human health sub-sectors declined during the month.

Employment continued to fall in September due to increasing resignations and retirements besides halt in new recruitments. Backlogs of Work continued to drop during the month with the ease of transportation difficulties faced by the staff.

Expectations for Business Activities for the next three months improved further with the developed optimism regarding the improvements in the economic conditions and with the upcoming festive season. 

Nevertheless, many respondents expressed their concerns over the supply side constraints, increase in Value Added Tax (VAT), introduction of Social Security Contribution Levy (SSCL) and increase in direct taxes, which could have negative effects on their business operations.