June PMI plunges signalling deep recession

• Services sector contraction shows people losing jobs while companies freeze hiring 

The Purchasing Managers’ Index (PMI) tanked in June signalling the sharp decline in the economy as businesses in both manufacturing and services sectors started feeling the crunch coming from the demand destruction policies in place, hyperinflation, fuel and other shortages.

Adding further to the woes, manufacturers also witnessed some softening demand from their overseas customers as the latter pulled back on their orders as they grew increasingly skittish over local producers’ ability to meet their orders amid the worsening political and economic conditions in the country which came to a head last week. 

The manufacturing sector PMI fell sharply to the contractionary territory to 44.1 index points from 50.3 index points in May. An index value of over 50.0 is considered an expansion of the activities while the value below 50 reflects contraction. 

PMI is a crucial barometer of the health of an economy and the sentiments expressed by its survey participants provide leading indicators for what could happen in the next three months in particular. 

“New orders declined particularly in the manufacturing of food & beverage sector partly due to the deterioration of purchasing power amidst the high inflationary environment,” the PMI survey said. 

What could add more pressure to the export-oriented manufacturing sector is the looming global economic slowdown and the near certain recession in the United States and perhaps in Europe in response to the tightening monetary policy and the energy sector squeeze. In a recession, people lose jobs and thus they cut down on consumption including the products they import.  

Fitch Ratings last week cautioned Sri Lanka and the rest of the emerging markets—many of which are already on the brink of an economic meltdown similar to what Sri Lanka is currently undergoing—of likely fallout from a possible eurozone recession largely due to the Russia-Ukraine war.

Meanwhile, the services sector which was already declining gave up further 2.1 index points to record 40.3 index value in June as the fuel shortage and the hyperinflation hamstrung nearly all services activities such as transportation, wholesale and retail trade, accommodation, food and beverage and education among others. 
“Continued supply-side constraints including acute fuel shortages led business activities in the services sector to decline further in June,” the survey findings noted. 

Although largely expected in a declining economy, what is more troubling was the deteriorating employment conditions in the country as the service sector froze hiring while there were also resignations on top of retirements which reflect losing economic opportunities. 

Sri Lanka is currently witnessing an exodus of talent at all levels, a condition which could exacerbate the already intense shortage of skills in the country which is paramount to recharge its growth engines.