Manufacturing, services activities record slowdown in October as economy wobbles

• Expectations for next three months improve over upcoming festive season and anticipated economic recovery 

Amid the high interest rates and taxes, runaway inflation and supply-side constraints, Sri Lanka’s manufacturing and services activities, as measured by the Purchasing Managers’ Index (PMI) compiled by the Central Bank, slowed down in October compared to the previous month.

Manufacturing PMI recorded an index value of 38.4 in October 2022, with a decline of 4.2 index points from the previous month, driven by the decreases recorded in all the sub-indices.

New Orders and Production declined significantly, particularly in the manufacture of food and beverages and textiles and wearing apparel sectors, mainly due to the demand-side impediments. 

Many respondents representing the food and beverages sector had mentioned they experienced a notable decline in demand amidst the deteriorating purchasing power of the consumers. 

Further, the export-oriented manufacturers, especially in the apparel sector catering to the North American and European markets, highlighted that the decline in demand observed was mainly attributable to the fear of an economic slowdown in respective destinations. 

Also, the manufacturers are still struggling to acquire the required raw materials amid high input costs. 
Employment recorded a decrease in October 2022, while Stock of Purchases also decreased in line with the decline in New Orders and Production. Meanwhile, Suppliers’ Delivery Time was shortened in October 2022 compared to the previous month. Expectations for manufacturing activities for the next three months remained in the negative territory, anticipating demand-side impediments to continue in the period ahead.

Meanwhile, services PMI dropped below the neutral threshold to an index value of 47.9 in October 2022, down 3.3 index points from September, due to the declines observed in New Businesses, Employment and Backlogs of Work. Nevertheless, Business Activities and Expectations for Activity continued its increasing momentum during the month.

New Businesses declined slightly in October 2022 compared to September 2022, particularly with the decreases observed in real estate, insurance and postal and courier activities sub-sectors. Business Activities in the services sector increased for the fourth straight month in October 2022, in line with the improvements in economic conditions. Accordingly, business activities related to other personal activities, financial services, education, professional services and programming and broadcasting sub-sectors showed improvements compared to the previous month. 

However, business activities in wholesale and retail trade and real estate sub-sectors specifically declined, mainly due to diminishing purchasing power of consumers, increase in Value Added Tax and imposition of the Social Security Contribution Levy.

Employment continued to fall in October, due to increasing resignations, migrations and retirements, in addition to the halt in new recruitments. Meanwhile, Backlogs of Work continued to drop during the month amid reduction in new businesses.

Expectations for Business Activities for the next three months improved further, due to the festive season and expectations on improvements in economic conditions. 

However, as continuously mentioned by many respondents, supply-side constraints, high direct and indirect taxes and cost of capital and input prices remain detrimental to their business operations.

Amid the extremely tight monetary policy adopted to fight the runaway inflation, Sri Lanka’s economy is estimated to contract by close to 9 percent this year.