Manufacturing, services contract in October as economy struggles

• PMI Index point to negative expectations for manufacturing activities for next three months
• Expectations for business activities in Services Sector improve for the next three months due to the festive season

 

The country’s manufacturing and services sectors contracted in October as per the Purchasing Managers Index (PMI) compiled by the Central Bank.

The Manufacturing PMI saw a decline of 4.2 index points in comparison to September driven by decreases recorded in all the sub-indices. The Services PMI by 3.3 index points due to the declines observed in new businesses, employment and backlogs of work. 

Nevertheless, business activities and expectations for activity continued its increasing momentum during the month.

Post November monetary policy review, the CBSL on Thursday said the real economy is expected to contract in 2022 impacted by the stability-oriented policy measures that led to tightened monetary and fiscal conditions, along with supply side constraints and prevailing uncertainties, among others. “Nevertheless, economic activity is expected to make a gradual, yet sustainable recovery, supported by envisaged improvements in supply conditions, improved market confidence, and the impact of corrective policy measures being implemented to stabilise the economic conditions,” CBSL added.

In terms of October Manufacturing PMI, CBSL said in New Orders and Production declined significantly, particularly in the manufacture of food and beverages and textiles and wearing apparel sectors, mainly due to demand-side impediments.

Many respondents representing the food and beverages sector mentioned they experienced a notable decline in demand amidst the deteriorating purchasing power of the consumers. Further, export-oriented manufacturers, especially in the apparel sector catering to the North American and European markets, highlighted that the decline in demand observed was mainly attributable to the fear of an economic slowdown in respective destinations. 

Moreover, manufacturers are still struggling to acquire the required raw materials amidst high input costs. Furthermore, employment recorded a decrease in October 2022 while Stock of Purchases also decreased in line with the decline in New Orders and Production. Meanwhile, Suppliers’ Delivery Time was shortened in October 2022 compared to the previous month.

Expectations for manufacturing activities for the next three months remained in the negative territory anticipating demand side impediments to continue in the period ahead.

In terms of Services PMI, New Businesses declined slightly in October 2022 compared to September 2022, particularly with the decreases observed in real estate, insurance, and postal and courier activities sub-sectors.

Business Activities in the services sector increased for the fourth straight month in October 2022 in line with the improvements in economic conditions. Accordingly, business activities related to other personal activities, financial services, education, professional services, and programing and broadcasting sub-sectors showed improvements compared to the previous month.

However, business activities specifically in wholesale and retail trade, and real estate sub-sectors declined mainly due to diminishing purchasing power of consumers, increase in Value Added Tax (VAT) and imposition of Social Security Contribution Levy (SSCL).

Employment continued to fall in October due to increasing resignations, migrations and retirements in addition to halt in new recruitments. Meanwhile, Backlogs of Work continued to drop during the month amid reduction in new businesses.

Expectations for Business Activities for the next three months improved further due to the festive season and expectations on improvements in economic conditions. However, as continuously mentioned by many respondents supply-side constraints, high direct and indirect taxes, cost of capital, and input prices remain detrimental to their business operations.