Manufacturing and services activities continue to expand in July

• Manufacturing activities gradually approaching pre-COVID levels, says Central Bank
• Employment improves in manufacturing; continues to slide in services sector for sixth straight month 
• Expectations on future business activities in both sectors continue to improve

Sri Lanka’s manufacturing and services activities continued to expand in July, as economic activities were seen normalising gradually, the Purchasing Managers’ Indices complied by the Central Bank (CB) showed.  

The CB highlighted that the manufacturing activities were gradually approaching the pre-COVID levels, with the normalisation of business activities in the 
virus-hit economy.

In July, the Manufacturing PMI continued to expand, recording 64.6 index points, mainly due to the expansion in the New Orders and Production sub-indices.

In particular, the sub-index of Stock of Purchases expanded at a higher rate in July, compared to June. The CB noted that this was due to the intended accumulation of stocks for future productions, anticipating higher demand with the normalisation of economic activities.

However, the expansion of the Manufacturing PMI slowed down by 2.7 index points in July, compared to June, when it climbed to a record high after the government lifted the two-month islandwide curfew in mid-May. 

In July, the expectation for overall manufacturing activities for the next three months improved, although with concerns on the subdued external demand, due to the COVID-19 pandemic that would continue to exert pressure on their business activities. 

In addition, manufactures also remain concerned about some manufacturing activities that have been impacted by the restrictions imposed on importation of certain categories of goods.
Meanwhile, Employment also continued to expand at a reasonable rate in the month.

However, Suppliers’ Delivery Time continued to lengthen in the month, although at slower pace, compared to June.

Meanwhile, the services sector expanded at an accelerating rate for the second consecutive month in July, with the Services PMI gaining one index point to reach 51.4 in July, from the previous month. 

“This was underpinned by the expansions observed in New Businesses, Business Activities and Expectations for Activity, compared to June 2020, indicating a further recovery in the services sector, which was affected by the COVID-19 pandemic,” the CB said.

Particularly, the New Business sub-index in financial services and insurance sub-sectors saw a notable improvement in July, with the gradual recovery in economic activities.

The CB said that business activities in most of the sub-sectors expanded in July, indicating a broad-based recovery in service activities.

“With the rise in financial facilities granted, business activities in financial services sub-sector improved in July 2020, compared to the previous month. Further, accommodation, food and beverage sub-sectors also recorded an improvement over the last month in line with the improvements in domestic tourism. Moreover, business activities related to wholesale and retail trade, health services and telecommunication sub-sectors also increased during the month,” it elaborated. 

However, the players in certain industries, particularly in cargo handling and import trade, expressed their concerns on the impact of restrictions imposed on non-essential items.

Despite the overall improvement seen in the Services PMI in the month, the Employment sub-sector continued to decline in July for the sixth consecutive month, with many firms yet to lift restrictions on new recruitments.

Further, Backlogs of Work declined in July, since most of the firms are operating under the usual working environment.

Despite the concerns, expectations on Future Business Activities increased in July, with the positive sentiments on the revival of economic activities in the forthcoming period.

Economic activity picks; but considerable slack still remaining: ICRA Lanka 

Sri Lanka’s economy gathered momentum in July, picking up from May and June, with the manufacturing and services sectors returning with full force, after the strict rules on social distancing and other guidelines were brought to a minimum, as the country managed to successfully contain the spread of the coronavirus.

Companies made new orders translating into strong production, which in turn put many people, who were made redundant during the pandemic, back to work. Meanwhile, the supply disruptions caused by the pandemic continued to fade, ICRA Lanka observed.   

According to the data on power consumption or demand for electricity, a closely watched indicator to gauge the level of the economic activity has continued its ascend in July, after reaching pre-pandemic levels in June, said ICRA Lanka, part of Moody’s Investors Service.

ICRA Lanka closely monitors the electricity demand in the country to make readings about the economy and its vibrancy each month. 

“Economic activities, specially the industry and services sector, improved in July, as reflected by the increased power demand,” the rating agency stated in its economic update for July.  Sri Lanka’s Purchasing Managers Index (PMI) staged a strong rebound in June, with new orders and stock of input purchases rising sharply during the month, reflecting a possible translation into production in the coming months. 

Meanwhile, Sri Lanka’s merchandise exports surpassed a billion dollars in July, in a further sign that firms had ramped up their production and value addition activities. 

However, the rating agency said it observes the prevalence of a considerable slack in the economy—an indication that the economic activities still have more room before they reach the pre-pandemic levels in the comparable period, last year. 

Sri Lankan economy shrank 1.6 percent in the first quarter, as industrial and agricultural activities contracted by 7.8 percent and 5.6 percent, respectively. 

In any case, the unconventionally higher monetary and fiscal stimulus targeted at domestic value addition industries and small business assistance could be propelling an otherwise modest pickup in activity across the economy. 

A stronger government with a two-thirds majority resulted from the recent polls will also clear certain legislative hurdles to expedite the implementation of economic policies for a faster recovery and will provide the much-needed political and policy stability for the next five years.  

The controls on imports of certain commodities have also prompted some industries to seek domestic substitutes, which could 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-driven restrictions.