Oct. biz activity battered by virus resurgence

• Both manufacturing and services PMI decline in Oct.
• First manufacturing sector PMI contraction since May
• 60% of PMI respondents cite virus restrictions as cause for contraction 
• Flow of credit to private sector, which recovered in Aug. and improved in Sept., expected to decline 

Purchasing Managers’ Index (PMI), a key barometer of the vibrancy of the economic activities across both manufacturing and services sectors, contracted in October, as the resurgence of COVID-19 in the country affected production.  

As a result, the manufacturing PMI for October recorded an index value of 40.3, down from 59.8 in September while the services PMI fell to 41.8, from 54.3 a month ago. 

An index value of above 50.0 denotes an expansion of activity while an index value of below 50.0 is defined as a contraction.

This is the first time since May the manufacturing PMI has recorded a contraction, albeit much lower than the 24.2 index points recorded in April, when the authorities opted for a complete lockdown of nearly two months, barring some essential services.

Since the authorities identified a fresh virus cluster on October 3, they resorted to a different tactic to deal with the virus by way of isolating only the high-risk areas, without resorting to countrywide lockdowns.

 “The production of all manufacturing sectors declined significantly together with the decline of employment in October,” the Central Bank said announcing the PMI data.

The global manufacturing PMI for the same month recorded an index value of 53.0, despite the signs of resurgence of the virus by the rising number of infections, as countries are now dealing with the virus with the least implications on their economies, as widespread lockdowns were proved counterproductive. 

The global service PMI was recorded at 52.9 index points in October, an acceleration from 52.0 in September. 
Meanwhile, the gradual recovery in the services sector PMI in Sri Lanka during the last four months was blunted in October, due to the declines in all sub-indices, except for the index of backlogs of work. 

“New businesses, particularly in financial services and insurance sub-sectors, declined in October 2020, compared to the previous month,” the Central Bank said in a potential forerunner for losing momentum in credit growth during the month. 

About 59.3 percent of the respondents to the PMI survey have cited that the dampened demand, caused by the virus-related restrictions, resulted in the decline in business activity in October, the Central Bank said. 

Meanwhile, some employees living in lockdown areas did not report to work while some employers were unwilling to employ their full workforce, due to the health guidelines restricting the maximum number of people that should be working in a single closed-door area, which affected the smooth operations of business activities. 

The Monetary Board is scheduled to announce its eighth monetary policy for the year this morning and the rate setting committee is largely expected to stay pat, as their earlier actions are taking root fast within the real economy, by way of falling interest rates and accelerating credit flows into the economy.