Monday, May 11, 2009

The Global Services Contraction Also Stabilises in April

The contraction in global services activity also seems to be easing up, following the pattern displayed by the manufacturing sector, and the JPMorgan Global Services Business Activity Index rose for the second month running in April, registering at 43.8 its highest level since last September. It is important to keep clearly in mind, however, that the headline index remained well below the critical dividing line of 50 which separates growth from contraction, and thus we are still firmly within global recession territory. So stabilistation in the contraction is not the same thing as recovery.

The JPMorgan Global Serices Report is based on the results of surveys covering around 3,500 executives in countries which taken together account for an estimated 60% of global service sector output.

Measured overall, worldwide services activity fell for the eleventh month running. Lower levels of activity were reported across all of the nations for which April PMI data were available. Rates of decline did however ease to their weakest in the current seven month period of decline in the US, to a six-month low in the Eurozone and to their weakest for seven and eight-months respectively in Japan and the UK. Only Ireland reported a faster drop in activity than during March.

Global services employment however continued to give cause for concern and declined for the twelfth month running in April. The US saw a severe reduction, albeit at a noticeably slower pace than in March. Japan cut jobs at the weakest rate of all the nations covered. The UK, Russia and Australia reported slower declines, whereas the rate of job loss in the euro area hit a series record. Deflationary pressures were evident, and average input costs declined for the sixth successive month in April. The sharpest reductions in costs were signalled for Ireland and the US. Input prices in the Eurozone fell at the fastest pace in the series history, but slower than the global average. The UK and Russia reported higher costs in April.

The JPMorgan data is also backed by the results of the twice-yearly survey of service sector sentiment published by Markit Economics this week. The survey is carried out in the same companies as are sampled for the monthly purchasingmanagers’ indices, and showed thatcompanies in European and emerging markets services sector havenow recovered much of the confidence lost at the start of the global recession.

The majority of companies report that they expect the volume of business to improve over the coming year, with revenues growing and new orders rising. There are however important differences, since while greater optimism is evident in the Bric countries of Brazil, Russia, India and China, some European economies have notably failed to rebound, with Germany standing out as a centre of gloom at the moment, with many German companies continuing to suffer major doubts that their business outlook will improve.

Across Europe in general, 39.5 percent of service providers stated they expect their volume of business to improve over the year ahead with 21.5 percent forecasting a decline. Thus there is a positive balance of +18. This balance is far higher than the -2.9 figure recorded last October, though it is not yet at the +30 level of a year ago when few companies saw a deep recession ahead.

In the Bric countries, on the other hand, the mood is even better. The balance of Brazilian companies expecting higher volumes of business was +60.4, higher than a year ago, and the steep declines in confidence earlier witnessed in Russia and India have now been reversed. The outlier here is the Chinese service sector, which is a little less optimistic than sixmonths ago, even if the outlook is still broadly optimistic. This may well suggest that earlier Chinese reactions where rather over optimistic, since the country's export sector is still facing veryserious problems.


The Eurozone services PMI staged its biggest one-month rise since December 2001 as Markit unexpectedly revised up its services business activity index to 43.8 following the earlier flash reading of 43.1. Activity thus registered its slowest pace of contraction in six months in a sector which covers everything from financial services to airlines. The figure was well above the 40.9 registered in March, but still heavily in contraction territory. The rate of contraction did, however, slow in all four of the biggest euro zone countries even reaching the slowest rate of contraction in nearly a year in Spain.

The eurozone composite PMI, which includes both manufacturing and services, was also up strongly - to 41.1 from 38.3 in March. This was again the highest level since October, and suggested the rate of economic contraction in the second quarter of the year may be rather better than the 1.9 percent contraction rate expected by consensus estimates for the first three months of the year. The eurozone economy contracted at a 1.6 percent in the final months of 2008 and we may well be in for something similar in Q2.

The movement in the reading for services business expectations to 54.4 from 48.6 in March was the biggest one-month rise in this index since January 2002, and this is likely to further encourage optimists who expect the eurozone economy to start to grow again before the year is out, but really it would be very premature to draw any longer term forward looking projections at this point, especially given sensitivity in the index to seasonal factors like Easter and the weather.

Business expectations were generally up, and were the best in 15 months for Spain, and in 10 months in both Germany and France, while in Italy they hit an eight-month high. The report, however, did suggest that unemployment, which is already at 8.9 percent for the euro area as a whole (and 17.4 percent in Spain), is set to rise even further, with record rates of job cutting being reported across the entire euro area service sector.

All eurozone countries reported significant downward price pressures, and these are reflected in producer prices (which fell over 5% year on year in March, lead mainly by energy and commodities) and consumer price disinflation, where year on year price increases were only 0.6% in April, for the second month running.


Spanish service sector activity continued to decline in April although as elsewhere the rate was much slower than in previous months. The headline activity index stood at 42.5, still well below the critical 50 level indicating growth, but way above 34.1 in March and November's record low of 28.2. April's figure was in fact the highest recorded since May 2008 but nevertheless marked the 16th consecutive month of contraction as the deep recession weighed on new orders and jobs. According to Andrew Harker ,economist at Markit Economics, "Jobs continued to be lost at a fast pace, indicating that the labour market remains a key source of weakness."

The survey showed staffing levels declined in April for the 14th month running as service providers cut jobs due to lower activity and to keep costs down. Hotel and restaurant firms were the hardest hit. However despite Spain's deep and ongoing economic crisis, April's survey was marked by confidence levels not seen in 15 months. Many of those surveyed by Markit said they believed the crisis would end within a year, with two-fifths of panellists expecting activity to be higher in 12 months and just 22 percent forecasting lower activity. However, companies remained relatively cautious about short term economic prospects.

The service sector thus is showing a significantly sharper rebound from the record declines of the last few months than is to be seen in the manufacturing sector, which continued to contract at a rapid pace in April.

Prices continue to fall, and services output prices registered the third-fastest decline in the survey's history, second only to February and March this year, with those surveyed citing increased competition for new business and pressure from clients. Service providers also reported falls in input costs due to reduced labour costs and lower prices from suppliers, but, according to Markit, the decrease here was less marked than that for output prices.


Italian service sector activity contracted for the 17th consecutive month in April although at the slowest rate for six months. The Markit/ADACI Purchasing Managers' Index rose to 42.0 from 39.1 in March, but still is not that far above the record low of 37.9 recorded in February. Activity has now been stick below the 50 mark that separates growth from contraction since November 2007.

The survey showed new business shrinking for the eighteenth straight month in April, though the rate of decline eased for the second month running, while expectations of business in a year's time rose to an eight-month high. As elsewhere, while optimism is rising Markit did point to record job losses as a likely on consumer spending looking ahead, making hopes of a swift recovery extremely premature. The employment sub-index fell to 44.0 from 44.6, as firms cut jobs at a survey record rate in response to the ongoing loss of business. The survey is thus consistent with other recent indicators that have pointed to an economy still mired in the deep recession that began in spring of last year, but with some grounds for thinking that the lowest point may now have been passed. Consumer and business sentiment as measured by the ISAE institute both rose in April, and the manufacturing PMI showed activity shrinking at its slowest rate for six months after the index hit a record low in March.

Deflationary pressure remained evident with service firms cutting their prices for the seventh month running and at the fastest rate in the survey's history in response to weak demand, while input prices showed no monthly increase for the first time since the survey began. The Italian government slashed its economic forecasts last week, and now project gross domestic product to fall by 4.2 percent this year following last year's 1.0 percent decline. The International Monetary Fund is more pessimistic, forecasting a 4.4 percent fall this year and a further drop of 0.4 percent in 2010. Italy thus now possibly faces three years of economic contraction one after the other although previously the country had not posted two consecutive years of falling GDP in its entire post-war history.


Activity in Germany's private sector shrank for the eighth month running in April, though as elsewhere the pace of the contraction eased, in the German case to the slowest rate since last October. The services sector PMI edged up to 43.8 from 42.3 in March, while the business expectations sub index jumped to 44.4 from 39.0, and the headline composite PMI reading rose to 40.1 from 38.3 in March.

Markit reported that "Pessimism about the year ahead outlook for activity was the least marked since June 2008. This partly reflected the support given to business sentiment from the government's economic stimulus plans, as well as hopes that overall market conditions will begin to stabilise". These firmer expectations are consistent with the rise in the April Ifo reading for German corporate sentiment, which hit its strongest level in five months.

However, despite the more positive business expectations, the German government has slashed its forecast for the economy, projecting a record 6-percent contraction this year. Previously it had not shrunk by more than 1 percent in any year since the second world war.

In harmony with this more sober assessment, the sub-index on employment fell to 40.6 from 42.3 in March. "We are now seeing the labour market feel the full force of the economic downturn, with the latest wave of private sector job losses the steepest for at least 11 years," according to Tim Moore, economist at Markit Economics. "This provides advance warning that April's spike in official unemployment numbers will be repeated during the months ahead ... firms are likely to make further substantial job cuts even after the worst of the recession has passed," he added. German unemployment rose for the sixth month running in April to hit its highest level since late 2007 despite government subsidies designed to prevent mass layoffs.


The contraction also eased in the French services sector in April, this time for a second successive month in April, and the Markit/CDAF final services PMI reached its highest level in six months at 46.5, up from 43.6 in March. The composite PMI also rose to 43.8 for the month, from a revised figure of 40.2 in March.

According to Markit panellists continued to report that overall operating conditions remained unfavourable and that falling new business had again negatively impacted on activity. New orders to service providers fell for the seventh consecutive month, with hotels and restaurants bearing the brunt of the downturn as customers cut back on discretionary spending. The business expectations index on the other hand climbed to 58.3 in April from 51.9 in March, and responses were more optimistic, with Markit reporting that 37 percent of respondents expected output to be higher in twelve months' time.

In the short term, however, the picture was pretty similar to that seen elsewhere , with firms continuing to make painful adjustments to cope with a harsh economic environment, slashing prices to boost sales, and making further sweeping cuts to staffing levels. April's output prices index showed prices falling for the eighth straight month, hitting a record low of 38.1, compared with the March reading of 38.4. The services employment index rose slightly to 41.0 from 40.8 in March, but still remained close to February's survey record low of 40.6, indicating a further steep contraction in the service sector workforce, according to the Markit report.


Russia's service industries contracted at the slowest pace in six months in April as business confidence improved, according to the monthly report from VTB Capital, with the PMI coming in at 44.4, compared with 43.9 in March.

While Russian services activity fell for the seventh consecutive month, it continued to rebound from December’s record fall of 36.4. The rate of decline in new orders also eased for the third month in succession after registering a record contraction in January. Prices charged by companies declined for the first time since VTB started compiling the survey as providers competed by offering lower prices and discounts, according to the report. Input prices advanced at the slowest pace on record.

Russia’s inflation rate fell slightly in April, dropping to 13.2 percent after rising to 14 percent in March, with consumer-price growth slowing to 0.7 percent month on month, according to the Federal Statistics Service. Retail sales were down an annual 4 percent in March, the biggest decrease since September 1999, as frozen credit markets and falling incomes forced Russians to curb spending, while GDP is now thought to have fallen 9.5% year on year in the first quarter of 2009.

United States

U.S. service-producing industries contracted again in April for the seventh straight month, but again the pace was slower than in March, according to the US Institute for Supply Management.

The ISM non-manufacturing index improved to 43.7% from 40.8% in March. This was the first increase since January. The index has now been below 50% since October, and touched its lowest level of 37.4% in November. Seven of 18 industries surveyed actually showed frowth in April, including real estate, entertainment, retail, and finance. The new orders index improved to 47.0% from 38.8%.

The employment index improved to 37% from 32.3%, indicating a slackening in the pace of job destruction.

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