Mixed start for economy in New Year

• Manufacturing sector deterioration continues; services sector picks up but reduced purchasing power, new tax structure and electricity rate hike cited as detrimental for rebound

 The economy in the New Year had had a mixed start with the manufacturing sector’s deterioration persisting and services sector picking up whilst reduced purchasing power, new taxes and electricity hike cited as deterrents for a future rebound.

The mixed performance was as per the January Purchasing Managers Index (PMI) compiled by the Central Bank of Sri Lanka.

It said the manufacturing PMI signalled a continued setback in manufacturing activities on a month-on-month basis in January 2023. 

The manufacturing PMI recorded an index value of 40.8 in January 2023, with a decline of 4.0 index points from the previous month driven by the decreases in all the sub-indices, except suppliers’ delivery time.

The decline in new orders and production was mainly attributable to the subdued demand condition observed, particularly in the manufacture of food and beverages, textiles and wearing apparel sectors. Many respondents involved in the manufacture of food and beverages mentioned they experienced a notable decline in demand mainly due to the deteriorating purchasing power of the consumers, in addition to the seasonal drop in demand following the December festival season. Export-oriented manufacturers such as those in the textiles and wearing apparel sector observed that the export demand remains subdued amidst a slowdown in major export destination economies, forcing them to run factories significantly below the full capacity.

Meanwhile, employment and stock of purchases also declined in line with the decline in new orders and production. Many respondents mentioned that they intentionally reduced material purchases with the inventory build-up. Further, suppliers delivery time lengthened in January 2023, compared to the previous month on a month-on-month basis.

Expectations for manufacturing activities for the next three months indicated an improvement, anticipating an increase in demand during the upcoming festive season, despite the decline in disposable income.

Services PMI recorded an index value of 50.2 in January 2023, remaining slightly above the threshold level. This was underpinned by the improvements observed in new businesses, business activities and expectations for activity.

New businesses improved at a faster pace in January 2023 compared to December 2022, particularly with the increases observed in financial services, education and real estate sub-sectors. Business activities in the services sector continued to increase at a slower pace in January 2023. Accordingly, financial services, education and telecommunication sub-sectors showed improvements during the month.

Further, in line with the increase in tourist arrivals, there were some improvements in business activities related to other personal activities and accommodation, food and beverages sub-sectors. However, business activities related to the wholesale and retail trade sub-sector continued to deteriorate amid off-season and reduced purchasing power of consumers. Furthermore, the transportation sub-sector also declined due to decrease in freight volumes, particularly related to textiles and the wearing apparel sector.

Employment declined in January at a faster pace due resignations, migrations and retirements occurred during the month. Backlogs of work also decreased at a faster pace during the month.

Expectations for business activities for the next three months continued to improve amid the upcoming festive season.

Positive sentiments on improvements in the economic conditions also lifted the expectations further. Nevertheless, reduced purchasing power along with new tax structure and proposed electricity rate hike were mentioned by some respondents as detrimental towards their future activities.