Japan - -Source: Markit Economics

Asia Services Sector: Japan's service sector moderately fell in May; the rate of expansion of Chinese firms was the slowest in 12 months and India's services economy cooled in May.

Japan:At 47.5, the seasonally adjusted headline Nomura Business Activity Index fell below the neutral level of 50.0 in May, pointing to a moderate decline in Japanese service sector activity that was the fastest in three months. Nonetheless, the rate of contraction was slower than the historical average for the series. Those respondents that reported a reduction in services output linked this to fewer intakes of new business and uncertainty about the outlook for the wider Japanese economy.

The decline in Japanese service sector activity weighed on the Nomura Composite Output Index, which fell to 50.5 in May from a revised figure of 51.9 in April. The index was at a level indicative of only a slight rise in

private sector output, and was supported above the neutral 50.0 threshold by the fastest rise in manufacturing production in 2010-to-date. undefined undefined

The level of new business taken by Japanese service providers fell in May, following a slight rise in the previous month. Although the fastest since February, the pace of decline was slower than the long-run series average. Where a reduction in new business was highlighted, respondents generally attributed this to lower market demand and an uncertain economic outlook.

At the composite level, private sector new orders rose at a negligible rate in May, with the decline in services offset by strong new business gains in manufacturing.

Work-in-hand (but not yet completed) in the Japanese service sector fell again in May, decreasing at a solid rate that was the most marked in three months. Backlogs have now fallen throughout much of the series history, with October 2007 the only exception. Although backlogs rose at a solid and accelerated rate in manufacturing, private sector outstanding business overall continued to fall in May.

Services employment in Japan fell further during May. However, the rate of job shedding was only fractional, and eased to the slowest in nine months. This, combined with the fastest rise in manufacturing employment since April 2008, meant that staffing levels in the Japanese private sector rose for the first time in twenty-two months.

Japanese service providers expect business activity to be higher in twelve months' time, although the degree of optimism was only modest. The positive outlook was linked by respondents to company expansion plans and hopes that the recovery in the wider Japanese recovery will gain momentum in the year ahead.

Commenting on the PMI data, Minoru Nogimori, Economist of the Financial & Economic Research Centre at Nomura, said: "The headline Business Activity Index in May fell by 2.7 points to 47.5. The index moved below the critical no-change mark of 50 again, suggesting that the pace of recovery in service sector slowed. But, the Business Expectations Index, which considers the expectations regarding firms' one-year outlook for activity, posted 51.6, above 50.0 for the third consecutive month. We think that the ongoing improvement in the manufacturing sector will spread to the service sector steadily in the coming months."

The Nomura Japan Services PMI (Purchasing Managers' Index) 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

China:At 54.2 in May, the seasonally adjusted headline HSBC Composite Output Index was consistent with a solid improvement in private sector business conditions. However, overall output growth was the slowest in twelve months, reflecting weaker rises in both manufacturing output and service sector activity. The increase in the latter was the least marked for a year, with the HSBC Business Activity Index falling to 56.4 from 58.5 in April.

The volume of new work taken by Chinese service providers rose again in May. Although still marked, the rate of expansion was the slowest in twelve months. This, combined with a much slower increase in manufacturing new orders, meant that overall new business rose at the slowest rate for a year.

Outstanding business at Chinese service providers fell in May, following a slight rise in the previous month. At the composite level, this was more than offset by a solid rise in backlogs of work at manufacturers, and overall levels of unfinished work in the private sector increased moderately.

Services employment in China continued to rise in May. Despite easing since April, the rate of job creation was marked, and the second-fastest since September 2007. Alongside a slower rise in manufacturing staff numbers, this meant that overall employment growth eased to a three-month low.

Average input costs faced by Chinese service providers rose for the seventh successive month in May. However, the rate of inflation was the slowest since November 2009. A similar trend was seen in manufacturing. As a result, overall input cost inflation was the weakest since last October.

Output price inflation in the Chinese manufacturing sector eased sharply in May, while service providers raised their charges at only a modest rate. Subsequently, private sector charges rose at the slowest pace in seven months.

Business expectations in the Chinese service sector remained buoyant in May. Survey participants reported that confidence was underpinned by future project developments and business expansion plans. However, the degree of optimism was the least marked in six months, with firms taking note of newly imposed government policies.

Commenting on the China Manufacturing PMI survey, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The slowdown in the services and manufacturing PMIs implies that the ongoing tightening measures are starting to take effect. But rising inflation means that quantitative tightening will continue, though the first rate hike may get delayed into 3Q."

The HSBC China Services PMI (Purchasing Managers' Index) 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.

India - - Source: Markit Economics

India: Activity growth across the Indian services economy cooled in May, as shown by a fall in the headline seasonally adjusted HSBC Business Activity Index from a twenty-one month high of 62.1 in April to 58.2. Nevertheless, the latest reading remained at a level consistent with a sharp expansion of output. Sector data revealed that activity growth was broad-based across all six sub-sectors monitored by the survey, with the fastest rise recorded by Post & Telecommunications.

Supporting May's increase in service sector activity was another considerable expansion of new business. Incoming new work has risen during every month since May last year, although the latest growth was slightly weaker than in April. Anecdotal evidence suggested that a good economic environment, successful promotional activities and strong company reputations were the key reasons for higher market demand. Transport & Storage posted the sharpest gains in new work, followed by Renting & Business Activities.

Larger workloads led to another accumulation of backlogs across India's services industry in May. Volumes of outstanding business grew at a moderate rate that was little-changed from that recorded one month earlier. Several respondents also mentioned delays caused by customers. The greatest build-ups were recorded in the Post & Telecommunications and Renting & Business Activities sub-sectors. Meanwhile, work-in-hand was broadly unchanged from April in Financial Intermediation.

To support greater business requirements, Indian service companies expanded their productive capacity in May. Employment levels increased at the same rate as the twenty-month peak recorded at the start of Q2. The rate of growth was robust and only fractionally weaker than the pre-downturn trend. Data showed that job creation was fastest in Post & Telecommunications.

With demand for services rising and economic conditions improving, optimism regarding future activity was recorded across all six sub-sectors in May. Of these, Hotels & Restaurants was the most optimistic, and ‘Other Services' the least. Consequently, positive sentiment remained strong overall, despite falling to its lowest level for four months. Planned advertising campaigns and good company reputations were also given as reasons for confidence.

Indian service firms raised their charges at a solid pace during the latest survey period. This was partly to generate larger returns amid favourable business conditions, but also to defend profit margins from rising costs. Input price inflation was sharp in May, driven by further hikes in raw material prices and salaries. However, both price measures eased from their twenty-month highs in April.

The India Services PMI (Purchasing Managers' Index) covers transport & communication, financial intermediation, business services, personal services, computing & IT and hotels & restaurants.