Source: Markit Economics

China's services sector slowed in June, reflecting the impact effect of property market tightening measures. Meanwhile, India's service sector is driving at full speed

China: At 52.2 in June, the seasonally adjusted headline HSBC Composite Output Index was consistent with a further improvement in private sector business conditions. Nonetheless, overall activity growth continued to lose momentum, with the latest rise the weakest in the current fifteen-month sequence of expansion. This largely reflected the first fall in manufacturing output since March 2009 and a slower rise in service sector activity. The latter was highlighted by a drop in the headline HSBC Business Activity Index to a fifteen-month low of 55.6.

Although new business received by service providers continued to rise in June, the rate of growth lost further ground on the strong expansion seen at the start of Q2 2010. Nonetheless, growth contrasted with the trend seen in the manufacturing sector, where new orders fell for the first time in fifteen months. As a result, the gain in total new business (manufacturing and services) was only modest.

According to the latest data, a faster fall in service sector outstanding business, coupled with renewed backlog clearance in manufacturing, meant that overall work-in-hand fell for the first time since March 2009.

Overall employment growth eased marginally in June, but was still solid. This was underpinned by job creation in the manufacturing and service sectors.

Composite data pointed to a substantial easing in price pressures in June. This was primarily led by the manufacturing sector, which saw both factory gate charges and average input costs fall for the first time in one year. Conversely, service sector charges rose modestly in June, and average cost burdens increased at a faster rate than in the preceding month.

Chinese service sector companies remained confident about the one-year outlook for business activity in June. Although still considerable, the degree of optimism was the weakest in fifteen months. Positive expectations were linked to hopes that new business growth will gain traction in the forthcoming year, while future plans to expand business operations were also mentioned. Conversely, those respondents that were pessimistic about future activity levels cited state policies aimed at curbing the overheated property market.

Commenting on the China Services and Composite PMI data, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "The slowdown in services activities reflects the effect of property market tightening measures. This, combined with the moderating manufacturing production, implies the economy is cooling off sequentially. But the continuously improving labour market and massive ongoing investment should support around 9% growth in H2."

Incoming new business to India’s service sector increased at a sharp and accelerated pace during the latest survey period. Respondents linked higher receipts of new work to a good economic climate and strong reputations for quality. Growth has now been recorded for fourteen straight months, the latest round of which was the sharpest since November 2007. New order growth in manufacturing weakened slightly in June, but remained above-trend. The Composite New Business Index climbed to a twenty-nine month high to signal a sharp monthly increase in total new work.

June’s sharp rise in activity levels was not sufficient to prevent a build-up of unfinished work at Indian service companies. In fact, backlogs accumulated at the fastest rate since September 2007. Outstanding business also rose in manufacturing, and at an accelerated pace. Reflecting the sector data, the Composite Outstanding Business Index rose to a series record peak and showed a robust rate of increase overall.

In response to further growth of new business, Indian service firms hired extra staff at the end of Q2, extending the current run of expansion to fifteen months. Employment rose solidly and at the fastest rate since August 2008 as a result. Meanwhile, staffing at manufacturers was unchanged. The Composite Employment Index fell slightly in June, but still pointed to a moderate rate of total job creation.

Services input price inflation slowed further from April’s twenty-month high in June. Nonetheless, the latest increase was marked, driven by both raw material price and wage rises. Input cost inflation also eased in the manufacturing industry, but more sharply. Consequently, the Composite Input Prices Index dipped over five points to a seven-month low. The latest figure indicated a solid rate of all-sector input cost inflation.

Partly to compensate for rising input prices, but also to boost profit margins as market demand strengthened, Indian service companies raised their charges in June. Moreover, the rate of increase accelerated fractionally since May. In contrast, manufacturers upped their tariffs at a slower rate. The Composite Output Index fell fractionally as a result.

Commenting on the India Services PMI survey, Frederic Neumann, Co-Head of Asian Economics Research at HSBC said: "India's service sector is driving at full speed. Despite a pull-back in manufacturing, firms in the tertiary sector are still receiving new business at a brisk pace and are boosting employment. As a result, price pressures remain elevated. India's economy, it appears, is shaking off weakness elsewhere, requiring an entirely different policy conduct than other countries in Asia."

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.