Expansion in PMI and GDP growth, signal of economic recovery

The Purchasing Managers Index (PMI) for December 2024 signaled expansions across the Services and Manufacturing sectors, reaching higher levels than the previous months.

The services sector experienced the most significant expansion, reaching an index value of 71.1, paralleling the record high index of 71.1 reached in July-24 driven by the holiday season and the peak tourism season, a sustained increase in new businesses, and improvements in wholesale and retail trade.

The manufacturing sector index rose to 57.2, propelled by increased production in the food and beverage sectors. The Construction sector in November 24 also experienced expansions with an index of 51.4, despite a decline from the previous month, attributable to unfavorable weather conditions.

The improvements in PMI are indicative of supply side expansion and a 5.5%YoY growth in GDP in 3Q-2024, signaling robust economic recovery and expansion says First Capital Research in their “Maintaining Momentum:Balancing Growth and Stability pre-policy analysis report.

“This strong growth trajectory reduces the immediate necessity for further monetary easing.”

Meanwhile, the report says that Inflation is expected to remain in the negative territory over the next few months. “Inflation is expected to turn positive over the medium term and align with the target level of 5.00%.”

With inflation well below the 5 % target, further rate cuts could create excess liquidity, resulting in an overheating of the economy and fueling inflationary pressures through increased borrowing. Additionally, private credit growth is already contributing to economic activity, indicating that the current interest rates are sufficient to sustain recovery. The completion of External Debt Restructuring (EDR) agreements in December 24 marks a milestone in Sri Lanka’s economic recovery. With debt repayments starting in December 24 and foreign payments increasing, the demand for dollar purchases will rise due to the dual requirements of debt servicing and expanding vehicle imports.

The Business Confidence Index (BCI) surged by 20 points in December 24 to 174 points, its highest level since Jan-20, marking a 58-month high. This sharp improvement is attributed to the completion of presidential and parliamentary elections and the External Debt Restructuring (EDR) agreements, which boosted investor sentiment and led to credit rating upgrades.

Fitch upgraded Sri Lanka’s rating from ‘RD’ to ‘CCC+’ on 20th December-24, and Moody’s followed with an upgrade from ‘Ca’ to ‘Caa1’ on 26th Dec-24. The BCI now stands 51 points above its historical median and 65 points higher than its 12-month average, gaining 74 points over the past three months. Confidence among business leaders is expected to remain high in the first half of 2025.

Source: Daily News