• News
  • Columns
  • Interviews
  • BW Communities
  • BW TV
  • Subscribe to Print
BW Businessworld

A Sinking Scenario

Photo Credit :

Growth in the Indian services sector slipped to a five-month low in March as optimism about the business outlook in the coming year faded to its weakest level since 2009, a survey showed on Wednesday. The Indian experience is further liked to be hampered by a rising food inflation till July as prices of vegetables and edible oils are set to rise before the monsoon breaks.

World over, the Euro Zone's services business remains mired in a mild recession while perking up in Britain and is more robust in Asia, according to data on Wednesday that underscored widening fault lines in a plodding global economy.

The HSBC Markit Business Activity index for India fell sharply to 52.3 in March from 56.5 the previous month, though it remained above the 50 level that divides growth from contraction for a fifth month.

Given that there are no concrete plans to stimulate growth in debt-ridden Europe, the onus remains firmly on developing nations such as China and India, which are slowing, to carry world economic growth.

Growth of new business, which had powered the modest rise in activity until now, eased and future expectations dipped. The survey compiler pointed to anecdotal evidence that the budget dampened sentiment about growth prospects for the economy.

Sagging orders kept euro zone businesses in the doldrums in March, although companies became more confident that better times lie ahead, a survey showed. That contrasted with evidence of a slowdown in India and wilting business confidence.

The uneven data come a day after markets were jolted by news that the US Federal Reserve, while guarded on the clearly brighter economic prospects there, looks far from considering any more stimulus for the world's largest economy.

Markit's Eurozone Composite Purchasing Managers Index (PMI), which gauges how thousands of companies - from banks to hairdressers and restaurants - fare each month, edged down to 49.1 in March from 49.3 in February, slipping further below the 50 mark that divides growth from contraction.

Although that was better than a preliminary reading of 48.7, survey compiler Markit said it probably consigned the euro zone to recession, defined as two consecutive quarters of contraction in gross domestic product.

"(It) suggests that the first quarter of 2012 was not as bad as the final quarter of 2011, but the last two months of surveys have been well below the upturn promised in January," said economists Janet Henry, European economist at HSBC.

"The strength of service sector business confidence raises hope for a future recovery."

The services PMI, measuring the fortunes of the services sector was a little less gloomy than originally portrayed, rising to 49.2 from 48.8 in February, a substantial upwards revision from the 48.7 flash reading for March.

Cautious Steps To Shore Up Growth
The troubled UPA government, faced with a slowing economy and a ballooning budget deficit, avoided bold reforms in its annual budget on March 16, instead opting for cautious steps to shore up growth.

"Activity in the service sector decelerated notably in March, although it is still expanding. New business also ticked in at a slower pace and the sentiment gauge took a dive," said Leif Eskesen, an economist at HSBC.

Meanwhile, input prices and prices charged to consumers inched up in March, suggesting February's increase in headline inflation, the first in five months, might be repeated when the March data comes out.

The wholesale price index, India's main gauge of inflation edged up to 6.95 per cent in February from a year earlier, driven by a surge in food prices.

"With inflation pressures still firm, the (Reserve Bank of India) will have to approach the easing cycle cautiously, and it may have to stay on the sidelines if the inflation outlook does not improve significantly soon," Eskesen added.

With inflation picking up again, market watchers are divided over prospects for an interest rate cut. The RBI was expected to start easing rates by end-March to spur flagging growth, but that timing has now been pushed back to later in the year.

The central bank has kept its main lending rate, the repo rate, at a three-year high of 8.5 per cent since December to clamp down on inflation, but has cut banks' cash reserve requirements by 75 basis points to ease tight liquidity.

Despite evidence that a slew of rate hikes since late 2010 is hurting growth in Asia's third-largest economy, the central bank has said that its hands are tied in the absence of credible fiscal consolidation.

The government expects the economy will grow by 7.6 per cent in fiscal 2012/13, up from 6.9 per cent in the current year, the lowest in almost a decade excluding the global financial crisis in 2008.

Indian manufacturing activity displayed a similar weakening trend by slowing for the third straight month as new orders fell and cost of raw materials rose, even as it has shown growth for three years.

Europe's Problems Persist
However, Europe's problems look far from over. Spanish borrowing costs jumped at a bond auction on Wednesday, jolting wider European markets, as this week's tough budget failed to calm investors' nerves about the country's finances.

New business levels continued to shrink and at a faster pace last month, which does not bode well for April, although services firms sounded more upbeat about the future, with business expectations at an eight-month high.

"With business confidence in the service sector running at a far higher level than late last year, the recession may also be brief," said Chris Williamson, Markit's chief economist.

That coincided with a new tranche of three-year loans given to banks by the European Central Bank in February, worth more than half a trillion euros.

But some euro zone countries are clearly doing better than others. Activity held essentially unchanged in France, while it picked up slightly in Germany. And the downturn in Spanish services activity, while still worrying, unexpectedly eased.

"The downturn is currently only very mild ... with gross domestic product probably falling by just 0.2 percent in the first quarter," said Markit's Williamson, speaking about overall euro zone growth.

That tallies with a Reuters poll of economists taken two weeks ago, which projected the euro zone economy would stagnate in the second quarter.

Employment in the services sector fell across the region for a third month, although Germany bucked that trend by posting its best upturn in jobs in the year to date, Markit said.

The UK services PMI, by contrast, taken together with manufacturing data earlier this week that also showed a better performance than the euro zone, suggested Britain's economy expanded by 0.5 percent in the first quarter, Markit said.

The Markit/CIPS services survey rose to 55.3 in March, well above 53.8 in February, confounding expectations for a decline to 53.4.