Economic activity ploughs ahead defying coronavirus snags

• June electricity consumption reaches pre-pandemic levels
• Electricity consumption is often used to gauge economic activity 
• Pent-up demand post lockdown could also be adding fuel
• June merchandise exports cross US $ 1bn mark

Since the lockdowns were lifted in mid-May, Sri Lanka’s economy appeared to have gathered steam with the recommencement of manufacturing activities amid improving order books and 
pent-up demand.

While the agricultural sector became hyperactive as focus shifted to food security and import substitution under government patronage, the activities across the industry and services sectors improved, an analysis of the country’s electricity consumption showed.

Electricity consumption is a closely followed metric to gauge the activity levels of an economy and thus is used as a proxy for the overall economy’s functioning capacity. 

According to ICRA Lanka, which tracks the monthly electricity consumption levels, the demand for power in June reached a level almost on par with the level seen in the same month in 2019. 

This could be an indication that the economy is making its lost ground due to the pandemic-induced lockdowns and activities are reaching their pre-pandemic levels, barring sectors such as leisure and tourism and air travel, which are considered more susceptible to the virus. 

“The activities in the economy, especially the industry and services sector, further improved in June, as evident by increasing power demand, which is almost on par with the June 2019 averages,” ICRA Lanka, a unit of Moody’s, said in its monthly economic update.

Compared to agriculture, the industry and services sectors consume more electricity.

The electricity consumption in May was at the 60 percent level, as the country returned to some semi-normalcy since the middle of the month, with the easing of lockdowns. 

The Purchasing Managers Index (PMI) data for May showed a rapid recovery of the manufacturing and services sectors, demonstrating that the economic actors were impatient to go back to what they were doing before the crisis struck them. 

“With improved mobility following the lockdown, trade and transportation sectors saw business activities picking up. Employment in troubled leisure and tourism sectors were seen contracting for yet another month. Backlogs started to de-escalate as business is returning to normalcy,” the rating agency added.  A strong recovery in merchandise export earnings in June, on part with the level in June 2019, is another indication of a robust rebound in manufacturing activities.

According to ICRA Lanka, June export earnings have reached US $ 1.02 billion, up from US $ 587 million in May.

Analysts opined that unconventionally higher monetary and fiscal stimulus targeted at domestic value addition industries and assisting small businesses could propel activity across the economy.

The controls on imports of certain commodities may have also prompted certain industries to seek domestic substitutes, which give rise to new industries and broadening the scope of the existing ones.  

The pent-up demand could also be adding some fuel to the rapid increase in activities in the immediate aftermath of the pandemic. 

The Central Bank and government hope for a faster, V-shaped recovery during the second half but much of it is contingent on the containment of the spread of the virus. 

The Central Bank however expects a contraction in the economy in the second quarter before seeing a recovery in the second half. ICRA Lanka forecasts a 4.5 percent contraction for the second quarter. 

Manufacturing, services activities rebound sharply after COVID plunge

Benefitting from the normalising of economic activities in the country, following the complete relaxation of the restrictions for mobility, the manufacturing PMI increased significantly in June 2020, recording 67.3, with a month-on-month increase of 18 index points compared to May 2020.

This increase in the manufacturing PMI is underpinned by the significant improvement in Production, New Orders and Employment, especially in the manufacturing of food and beverages and textiles and wearing apparels sub-categories, where many respondents highlighted that their factories were operated throughout the month of June, receiving more new orders than in the previous month, mainly supported by the local demand.

In line with the growth of New Orders, Production and Stock of Purchases also increased at a higher rate during the month. Employment sub-index increased beyond 50-threshold with the improved manufacturing activities. As the COVID-19 outbreak adversely affected the global supply, the Suppliers’ Delivery Time continued to lengthen, albeit at a slower pace, during the period.

The overall expectations for manufacturing activities for the next three months significantly improved compared to the previous month, yet the manufacturers are still concerned that the subdued external demand due to the COVID-19 pandemic would continue to put pressure on their business activities.

Meanwhile, the services PMI returned to growth territory in June 2020, reaching 50.4, after recording index values less than the 50.0 threshold level for three consecutive months.
This was underpinned by increases observed in New Businesses, Business Activities, Employment and Expectations for Activity sub-indices.

New Businesses, particularly in financial services, insurance and wholesale and retail trade sub-sectors improved in June 2020, with the gradual normalisation of economic activities.
Business Activities also expanded during the month, indicating an expansion in Service activities. With the complete lifting of domestic travel restrictions, business activities in the transportation sub-sector improved in June 2020, compared to the previous month.

Further, business activities related to wholesale and retail trade, financial services and other personal services also increased during the month.

However, respondents, particularly in transportation and accommodation, food and beverage sub-sectors, were concerned about the possible impact of deterioration in international trade and prevailing international travel restrictions on their business activities.

Employment continued to decline in June 2020, compared to the previous month, due to the halt of new recruitments. Further, Backlogs of Work declined in June 2020, implying that any increase in demand could be met with the existing capacity of service providers.