Source: Markit Economics

China's service activity remained broadly unchanged in February while PMI (Purchasing Managers' Index) data for India showed sharp growth in the service sector in the month.

China:Despite falling to a four-month low of 57.3 in February, the seasonally adjusted headline HSBC Composite Output Index remained at a level indicative of a marked rise in Chinese private sector activity. The slowdown in growth mainly reflected a weaker expansion of manufacturing production, as activity growth in the service sector remained broadly unchanged on the month. This was signalled by the HSBC Business Activity Index, which fell only slightly from 56.8 to 56.7 in February.

The level of new business taken by Chinese service providers rose again in February, albeit at a reduced rate. This, combined with a slower rise in new order intakes at manufacturers, meant that overall new business growth eased in February. Outstanding business in the service sector fell in February following two successive months of expansion. This was offset by higher backlogs in the manufacturing sector, which rose solidly. Subsequently, the overall level of work-in-hand at private sector firms increased for the eleventh month running, but at the slowest rate since September last year.

Composite data signalled that private sector employment rose in February, although the rate of job creation was the slowest since last July. This reflected weaker growth of staffing levels in both manufacturing and services.

Average cost burdens faced by Chinese private sector companies rose sharply in February, albeit at a much slower rate than in the previous month. By sector, manufacturers saw a notable slowdown in the rate of input price inflation, while service providers recorded a sharper rise in the average cost of their purchases. A similar trend was seen for output charges. Manufacturers reported raising their factory gate prices at the slowest rate in four months, but output price inflation in the service sector was the fastest since June 2008. At the composite level, this meant that private sector charges rose at the least marked rate in three months.

Data signalled that Chinese service providers expect business activity to be higher in twelve months’ time. Despite easing from January’s eighteen-month high, the degree of optimism remained considerable.

Commenting on the China Services and Composite PMI data, Hongbin Qu, Chief Economist for China at HSBC said: “Rising new business and continuous job creation in both services and manufacturing sectors point to an accelerating trend in economic growth. Meanwhile, inflation is picking up as buoyant demand helps to pass fast rising input costs into higher final product prices.”

The HSBC China Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 400 private service sector companies. The panel has been carefully selected to accurately replicate the true structure of the services economy.

Source: Markit Economics

India: The headline seasonally adjusted HSBC Business Activity Index climbed for the third month running in February, hitting its highest level since September 2008 and signalling sharp growth of Indian service sector output. Moreover, the latest figure (60.9) was broadly on a par with the pre-downturn series trend. Manufacturing production growth also accelerated since the start of 2010. Consequently, the HSBC India Composite Output Index rose for the third straight month to its highest level for a year-and-a-half. The latest reading pointed to a sharp increase in all-sector output.

Underpinning services activity growth during the second month of 2010 was a faster rise in new business. New work received by Indian service firms increased at a considerable pace that was the most pronounced for seventeen months. Anecdotal evidence suggested that improving economic and financial climates had prompted companies to extend their service ranges and engage in promotional activities. Reports also indicated that strong company reputations had played a part in supporting demand. Meanwhile, manufacturers reported a quicker increase in new orders. Reflecting the sector data, the Composite New Orders Index signalled a substantial monthly rise in total new work.

Unfinished work at Indian service providers accumulated for the tenth straight month in February as workloads increased. However, the pace of growth was only slight and far weaker than the pre-crisis trend, reflecting some firms’ efforts to clear backlogs. Data pointed to a similar situation in manufacturing. The Composite Outstanding Business Index showed a mild rate of overall backlog accumulation.

Job creation at service firms persisted at a moderate pace during the latest survey period. Companies stated that greater workloads, a favourable economic climate and business expansions were all key factors behind decisions to hire more staff. Employment growth in manufacturing was broadly the same as in services.

Service sector input costs rose at a robust pace in February, although more slowly than January’s sixteen-month peak. Respondents linked the increase to higher wages and greater raw material prices. Manufacturers also reported a slowdown in the rate of purchasing cost inflation. Although the Composite Input Prices Index fell since January, it remained at a level consistent with a marked increase in input costs.

Favourable demand conditions enabled service firms to raise their charges in February. However, inflation eased to a more modest pace. Meanwhile, charge inflation slowed sharply from January’s eighteen-month high in manufacturing. The Composite Output Prices Index fell as a result.

Commenting on the India Services and Composite PMI data, Robert Prior-Wandesforde, Senior Asian Economist at HSBC said: "This is another excellent service sector PMI release, complementing the manufacturing PMI for the same month. At 60.9 in February, the key business activity series is up more than 5 points since November, 20 since the low in February 2009 and above the series average of 57.9. Although the relationship with services GDP is not perfect, the PMI paints a very encouraging picture of activity in the sector. Put this together with the manufacturing PMI and it would be surprising if ex-agriculture GDP didn't grow at a double-digit pace in the first quarter of 2010. It certainly suggests that we shouldn't over interpret the disappointing fiscal Q3 GDP release which mainly reflected a big drop in government consumption.

“Of the other series, it is encouraging to see the business expectations index rising further above 50.0 having experienced a couple of disappointing months, while new business component hit its highest level since the cyclical upswing began. There was even some good news on inflation, with the input prices and charges indices both slipping back in February, although they did remain in expansionary territory.”

The HSBC India Services PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in around 350 private service sector companies. The panel has been carefully selected to accurately replicate the true structure of the services economy.