Indian Service sector rebounds and roars

India's services sector grew at its fastest pace in five months in December riding on a surge in new business and expansion in employment.

However, there is also a negative aspect as rising input prices will likely add to inflationary pressures in the coming months, a survey showed.

The HSBC Markit Business Activity Index -- based on a survey of around 400 firms -- rose to 54.2 in December from 53.2 in November, staying above the 50 mark that separates growth from contraction for the second month in a row.

The index had contracted to levels below 50 in September and sunk to a two-and-a-half year low of 49.1 in October.

In the December survey, the new business sub-index jumped to 55.7 from 52.3 in November, thanks to an improvement in demand.

Activity in the services sector picked up pace in December led by faster growth in new business, underscoring the resilience of the sector, said Leif Eskesen, economist at HSBC.

Both the services PMI index (Purchasing Managers Index) and the new business sub-index were at their highest levels since July.

The employment index, which expanded for the first time in six months, also added to the positive mood of December's survey.

Optimism over future business prospects remained strong and improved slightly in December from a near three-year low in November.

While the services sector is certainly headed into 2012 on an upswing, the headline PMI index is still a far cry from 2011's peak of 60.1 it hit in February.

Persistant risks of inflation clubbed with the lingering euro zone crisis is likely to continue to mire the Indian economy in 2012.

India's services sector includes the software services industry which gets more than 90 percent of its revenue from overseas clients.

Two weeks ago, technology bellwether Oracle Corp posted its first quarterly earnings miss in a decade, sending renewed fears of a slowdown in technology spending rippling across the globe.

Oracle's shocking results also had investors worried that they had overestimated the resilience of corporate technology spending in a fragile global economic environment.

In reaction to that news, shares of Indian technology services stalwarts, including those of Infosys Ltd and Tata Consultancy Services, fell.

Inflationary pressures in the Indian economy, which have been snaking upwards over the past two months, intensified in December with input prices growing at their fastest rate in nine months.

The Reserve Bank of India (RBI), which has been consistently raising its key interest rates to battle inflation, kept rates on hold at its Dec. 16 meeting as concerns over growth are seen taking precedence over inflation in 2012.

An interest rate cut by the central bank might be on the cards as the RBI Governor, Duvvuri Subbarao, told BBC in an interview on Monday that a reversal of monetary tightening could be expected.

However, HSBC's Eskesen said the services and manufacturing PMI numbers suggest that it is premature for the RBI to replace inflation with growth as the main concern.

A similar survey of the manufacturing sector on Monday showed India's manufacturing activity hit a six-month high in December as factory output and new orders from domestic and international firms spiked.

India service sectors slows marginally to 53.8---Markit

 India’s services industry grew at the slowest pace in more than two years in August after the central bank’s record interest-rate increases and a weakening global economy restrained consumer demand.

The Purchasing Managers’ Index fell to 53.8 last month from 58.2 in July, HSBC Holdings Plc and Markit Economics said in an e-mailed statement today. That’s the lowest level since June 2009. A reading above 50 indicates an expansion.

Asia’s growth has slowed as a faltering recovery in the U.S. and Europe’s debt crisis hurt the region’s exports, complicating monetary policy for central banks still grappling with price pressures. India’s manufacturing grew at the slowest pace in 29 months in August, a report showed last week, while inflation has exceeded 9 percent for eight straight months even after 11 rate increases by the Reserve Bankof India since mid-March 2010.

“The lagged effects of monetary policy tightening, the elevated level of inflation and the now heightened uncertainty about the global economic outlook” led to the slowdown in services growth, Leif Eskesen, a Singapore-based economist at HSBC, said in the statement. Still, inflation “remains the dominant concern, calling for a few more policy rate hikes before the RBI can call it quits,” he said.

The Bombay Stock Exchange Sensitive Index fell 1.3 percent as of 12:01 p.m. in Mumbai. The rupee slid 0.3 percent to 45.9313 a dollar, according to data compiled by Bloomberg.

China Services

A separate HSBC-Markit report showed the Chinese services index fell to a record low of 50.6 last month as new business growth moderated, adding to evidence the economy is slowing after the government raised interest rates, curbed lending and limited property purchases.

Companies from UBS AG and Credit Suisse Group AG to Morgan Stanley have cut estimates for Indian economic expansion. UBS predicts 7.2 percent growth for 2011-2012, lower than an earlier estimate of 7.5 percent.

India’s Purchasing Managers’ Index for manufacturing fell to 52.6 in August from 53.6 in July, HSBC and Markit said Sept. 2. Service industries in the U.S. probably expanded in August at the slowest pace in more than a year, adding to concern the recovery is losing steam, a Bloomberg News survey showed before a report this week on the Institute for Supply Management’s non- manufacturing index.

Moody’s Forecast

The South Asian nation’s economy may expand 7.5 percent to 8 percent in the financial year through March while inflation may ease to about 7 percent over the year, Moody’s Investors Service Senior Analyst Atsi Sheth said in a report today.

“Given current global uncertainty, and the continuing transmission of the RBI’s tightening over the last year, the risks to both forecasts are on the downside,” Sheth said. Still, a slower growth rate in the 7 percent range wouldn’t change Moody’s assessment of the country’s sovereign credit outlook, she said.

Reserve Bank of India Governor Duvvuri Subbarao raised the benchmark repurchase rate by 0.5 percentage point to 8 percent on July 26. While threats to growth could increase if global financial risks amplify, the “immediate challenge to sustaining growth” lies in taming inflation, the central bank said Aug. 25.

“There has been a moderation in growth but it has not collapsed,” Samiran Chakraborty, a Mumbai-based economist at Standard Chartered Plc, said before the report. “Controlling inflation will take priority over growth concerns and we will see the central bank raising rates.”

Commercial loans given by banks such as ICICI Bank Ltd. rose 20.22 percent from a year earlier as of Aug. 12, according to data compiled by Bloomberg, exceeding the central bank’s 18 percent projection. Mobile-phone operators including Bharti Airtel Ltd. added 7.64 million customers in July, a 1.28 percent increase from the previous month, according to the Cellular Operators Association of India.

Eurozone Contracts, Japan In Recession.,

                                                                                                                                                                                                       Eurozone drifts nearer to stagnation in July, as Germany and France slow further and Spain falls back into contraction
                                                              Data collected 12–26 July.
Key points:
.. Final Eurozone Composite Output Index at 22-month low of 51.1 in July (flash estimate: 50.8).

.. Growth led by France, as Germany slows sharply. Contractions seen in Italy and Spain.

.. Further job creation in Germany and France, while pace of losses eased               outside of the big-two.
                                              Output growth slips closer to stagnation

Having eased sharply in each of the previous three months, Eurozone private sector growth moved closer to stagnation at the start of Q3 2011.
The Final Eurozone PMI® Composite Output Index fell to 51.1 in July, down from 53.3 in June. Although above the earlier flash estimate of 50.8, the final reading was still the lowest since September 2009. Activity has risen throughout the past two years.

Output growth eased in both the manufacturing and service sectors in July. Manufacturing production scarcely rose over the month. Meanwhile, the rate of expansion in service sector business activity was the weakest since September 2009.
The slowdown was broad-based by nation. Rates of expansion were the least marked since October 2009 and August 2009 in Germany and France respectively, and well below those seen in the opening quarter of the year. Further contractions were seen in Italy and Spain. In the case of Spain, the rate of decline was the steepest for 19 months.
                                              Nations ranked by output (July)
                                              France 53.2 23-  month low
                                              Germany 52.5 21-month low
                                              Italy 49.1 2-        month high
                                              Spain 46.1 19-   month low



The principal factor underlying weaker output growth was a near stagnation of inflows of incoming new business. Levels of new work slowed on the back of weakening conditions in domestic markets and the first decline in new manufacturing export business (including intra-Eurozone trade) for two years.
The rate of expansion in new business eased sharply in Germany (weakest in two-year period of growth) and also moderated in France (23-month low). Italy reported a further reduction, while Spain saw new orders fall back into contraction with the steepest rate of decline since the end of 2009.


                 Job creation continues in big-two nations, rates of reduction ease in Italy and Spain


Job creation held up comparatively well in light of the slower expansions in output and new business. Employment rose for the fifteenth month running in July, with the rate of increase only slightly below the average for that period. Payroll numbers rose at both manufacturers and service providers.
The slowdown mainly reflected weaker job creation in Germany. However, Germany still reported the strongest increase in payroll numbers overall, followed at some distance by France (which saw a faster rate of jobs growth than in June). Although further losses were recorded in Italy and Spain, rates of decline eased in both nations.
                                             Output price indices by nation


July saw average input price inflation ease further from March’s 32-month high. Slower cost increases were reported in both the manufacturing and service sectors, with by far the sharper easing seen at manufacturers. Cost inflation slowed in all of the nations covered by the survey.

        
                              Japanese private sector activity falls at solid pace in July

Key points:

.. Composite data signals fifth successive monthly decline in business activity

..  Private sector new work falls only marginally

..   Service sector optimism remains solid

Summary:

              Japanese service providers reported lower business activity for the sixth consecutive month during July, as intakes of new work continued to fall amid weak domestic consumption. Companies further reduced their employee numbers in response. Looking ahead, service providers expressed a solid degree of optimism in the one-year business outlook. Meanwhile, output prices and input costs decreased at marked and marginal rates respectively.

The seasonally adjusted Business Activity Index posted 45.3 in July, down fractionally from 45.4 in June,

India's service PMI by Markit- Fall to 55 from 59.2 --- May 2011

 India's services sector expanded at its slowest pace in 20 months in May as soaring prices and interest rate hikes gnawed at new business growth and reduced the level of optimism ---- Markit

The seasonally adjusted HSBC Markit Business Activity Index, based on a survey of over 400 firms, slipped to 55.0 in May from 59.2 in April, marking its twenty-fifth successive month above the 50 level that divides growth from contraction.

While the latest reading underlines a reasonably solid pace of growth in the services sector, its decline is an indication that continuous rate rises aimed at containing inflation are putting the brakes on India's rapid expansion.

"The easing momentum for business activity and new business is evidence that policy tightening and high inflation is filtering through to growth," said Leif Eskesen, chief economist for India & ASEAN at HSBC.

All sub-indexes saw a fall when compared to April, with the exception of input costs and employment.

New business received by service companies remained strong but the pace of expansion slowed with the sub-index falling to its lowest level since October last year.

Among the sub-indexes, business expectations saw the steepest fall to 67.8 in May from 72.8 in April, as respondents, though confident of the sector's performance over the next 12 months, slightly tempered expectations as economic uncertainty loomed.