Source: Markit

Lacklustre growth of Chinese private sector activity in July reflected a further fall in manufacturing output. Japan experienced the fastest fall in private sector activity in 5 months while in India composite output growth slowed from June’s twenty-three month peak in July, but remained substantial.

China: At 52.6 in July, up slightly from 52.2 in the previous month, the seasonally adjusted headline HSBC Composite Output Index was at a level indicative of a modest improvement in private sector business conditions. The subdued rate of growth contrasted with the near-record expansion seen at the beginning of 2010. This primarily reflected a second successive monthly fall in manufacturing output, as services activity growth remained marked. The latter was highlighted by a rise in the seasonally adjusted HSBC Business Activity Index to 56.3.

The level of new business received by Chinese service providers rose again in July, extending the current period of growth to twenty months. The rate of expansion was marked, and the fastest in three months. In contrast, manufacturing new orders fell at the fastest rate since March 2009. As a result, total new business growth remained relatively muted.

At the composite level, backlogs of work deceased for the second month running in July, albeit only marginally. This mainly reflected a further drop in outstanding business in the service sector.

July data signalled that staffing levels in the Chinese service sector continued to rise in the latest survey period. The rate at which companies added to their staff numbers was solid, and slightly faster than in June. Nonetheless, overall employment growth eased for the fourth successive month in July. Underpinning this was a slower rise in manufacturing employment.

Composite data pointed to a further easing in price pressures in July, with falls in both input prices (for the first time since May 2009) and output charges (for the second time in as many months). In both cases, this predominantly reflected falling prices in the manufacturing sector.

Latest data indicated that Chinese service providers were highly optimistic about the one-year outlook for business activity. However, the degree of positive sentiment was the second-lowest in sixteen months. The positive outlook was linked by panellists to expectations of future new business wins.

Commenting on the China Services and Composite PMI data, Hongbin Qu, Chief Economist, China & Co-Head of Asian Economic Research at HSBC said: "This improvement in the July service PMI reading, though modest, reflects the resilience of the domestic part of the economy, in particular consumer-related sectors. Combined with the sustained recovery in the labour market, this should cushion the economic slowdown in the coming quarters."

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. Markit says the panel has been carefully selected to accurately replicate the true structure of the services economy

Source: Markit

Japan: The seasonally adjusted Nomura Business Activity Index posted 46.3 in July, down from 47.1 in the preceding month, and a level indicative of a moderate decrease in Japanese service sector activity. The rate of decline was slower than the long-run series average, despite quickening to the most marked in the current three-month period of contraction. Where a reduction in activity was signalled, survey respondents widely attributed this to falling new business.

The faster fall in service sector activity, combined with slower manufacturing output growth (thirteen-month low), weighed on the seasonally adjusted Composite Output Index in July. The index remained below the neutral 50.0 threshold for the second month running, posting 48.6, and pointing to the fastest drop in private sector output since February.

The level of new work taken by Japanese service sector companies fell again in the latest survey period, decreasing at a solid rate that was the fastest in five months. Nonetheless, the pace of reduction was slower than the series average. Those firms that reported a drop in new order levels often linked this to reduced market demand. July was the third month running in which new business has fallen.

At the composite level, private sector new business decreased at the fastest rate in five months during July. This reflected a steeper decline in service sector new work and a slowdown in the rate of new business growth in manufacturing.

Mainly reflecting spare capacity, backlogs of work in the service sector fell further in July. The pace at which outstanding business was depleted was marked, having accelerated to the steepest in six months. As a result, private sector unfinished business fell solidly in July.

Services employment in Japan continued to fall in July, extending the current period of decline to two years. However, the pace at which firms reduced their staff numbers was only slight, and the second-slowest in 2010 to date. Anecdotal evidence suggested that job shedding reflected fewer intakes of new business.

Composite data signalled that job shedding persisted in the Japanese private sector overall, although the rate of decline was only slight.

Average input costs faced by Japanese service providers fell in July. The rate of input price deflation was moderate, but quickened to the fastest since April. Survey participants generally attributed reduced cost burdens to falling raw materials costs, with food mentioned in particular. This was reflected in the sector data, with Hotels & Restaurants recording the fastest fall in purchase costs.

Manufacturers registered a slower rise in input costs in July. Subsequently, the composite measure for input prices dropped below the neutral level of 50.0 for the first time in four months.

Output price discounting in the service sector persisted in July, largely as a result of increased competition for new business. The rate of decline was marked, and the fastest since March. Client requests for lower charges were also cited as having dampened firms’ pricing power. A similar trend was seen in the manufacturing sector, with output prices falling at a faster rate since June. As a result, the overall rate of price discounting was the steepest in four months.

Service providers’ expectations about the one-year outlook for activity turned negative in July, although the degree of pessimism was only fractional. Negative sentiment was linked to fears that the ongoing economic recovery will falter 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 July fell for the third straight month, by 0.8 points to 46.3. It posted below the critical no-change mark of 50 for the third consecutive month, suggesting that service sector activity is weakening. The Business Expectations Index, which considers the expectations regarding firms’ one-year outlook for activity fell by 2.7 points to 49.8. Moreover, July's manufacturing PMI fell 1.1pt m-m to 52.8, with the second consecutive monthly fall pointing to a slowing pace of manufacturing sector improvement. We think that service sector activity could remain sluggish with manufacturing sector activity also slowing."

The Nomura Japan 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

India: The headline seasonally adjusted HSBC Business Activity Index slipped to 61.7 in July from June’s two-year peak of 64.0. Nevertheless, the latest reading pointed to a substantial expansion of Indian service sector output. In contrast, manufacturing production growth accelerated to a rapid pace. The HSBC India Composite Output Index fell to 61.9 in July, from a twenty-three month high of 62.8 in June. The latest reading nevertheless signalled another sharp increase in all-sector activity.

After accelerating to a thirty-one month peak at the end of the second quarter, service sector new business growth slowed to a four-month low in July. Even so, the latest increase was sharp, with one-quarter of panel members registering an expansion in new work. Anecdotal evidence suggested that a more favourable economic environment, strong reputations for quality and successful promotional activities all supported demand for services. Meanwhile, manufacturers noted a fractionally faster inflow of new orders. Overall, the Composite New Orders Index pointed to a slower – but still considerable – increase in new work.

Indian service providers noted a modest build-up of unfinished business during the latest survey period, which they largely attributed to a combination of heavier workloads and customer delays. The latest accumulation was the mildest since February. Backlogs at Indian manufacturers rose at a moderate, but weaker, rate in July. Consequently, the Composite Outstanding Business Index fell to a four-month low to signal a moderate increase in total work-in-hand.

Personnel numbers at Indian service providers continued to rise in July, extending the current sequence of growth to sixteen months. Firms indicated that additional workers were needed in order to cope with greater market demand. However, the rate of increase eased to a moderate pace that was the weakest since March. Staffing levels were largely unchanged at manufacturers. The Composite Employment Index posted its lowest reading since March and indicated a modest rate of job creation overall.

Input price inflation in the service sector accelerated to a sharp rate in July, after slowing in June. Consequently, companies continued to raise their charges at a solid pace. Reports indicated that greater wage, fuel and raw material costs drove increases in both variables. In the manufacturing industry, both input and output price inflation accelerated slightly. The Composite Input Prices Index rose since June, pointing to a stronger build-up of total cost pressures. Meanwhile, the Composite Output Prices Index was unmoved.

Commenting on the India Services PMI survey, Frederic Neumann, Co-Head of Asian Economics Research at HSBC said: "India's service sector is gearing down a notch, albeit from an extremely fast pace. This doesn't imply that the engine is stalling, however. Both output and new business continue to advance quite robustly, even if firms have eased off on their hiring and noted a slower rise in backlogs. Most relevant for the central bank is that input prices in the service sector continue to rise. Evidently, the slowdown in services has so far done little to ease cost pressures in the economy. Inflation of prices charged has only eased marginally. Officials, therefore, cannot afford to let down their guard, and more interest rate hikes are on the horizon."