Sri Lanka’s services boom offsets manufacturing slowdown as PMI data shows uneven August recovery

Sri Lanka’s economy sent a mixed but broadly positive signal in August, as new Central Bank data show services activity accelerating sharply even as manufacturing growth lost momentum.

The Purchasing Managers’ Index for Services jumped to 65.6 in August from 61.4 in July, marking an acceleration in what was already a strong expansion. The pickup was broad-based, led by transportation, wholesale and retail trade, and professional services, with financial and other personal services also contributing. New business volumes rose again, employment increased on the back of fresh hiring, and backlogs of work fell, reversing July’s build-up. Businesses remain upbeat about the quarter ahead too, buoyed by expectations of stronger tourist arrivals, though the Expectations for Activity sub-index eased slightly from 75.0 to 71.7, suggesting confidence, while still elevated, is moderating.

Manufacturing told a more cautious story. The headline PMI slipped to 53.0 from 55.0, still comfortably in expansion territory above the neutral 50 mark, but at a visibly slower pace. New Orders dropped to exactly 50, the neutral threshold, pointing to broadly flat demand rather than continued growth. Production fell further, to 48.4, tipping into contraction, a decline the Central Bank attributes largely to the textiles and wearing apparel sector, historically one of the most externally exposed segments of Sri Lankan industry and a useful bellwether for global demand conditions. Employment and stock of purchases both rose at a faster clip, which on the surface looks like firms hiring and stocking up ahead of year-end seasonal production. But paired with softening orders and falling output, it could equally reflect inventory building against continued supply-side friction: Suppliers’ Delivery Times lengthened further, to 63.0, extending a persistent pattern of delivery delays through the year.

Viewed together, the two indices point to an economy where domestic and tourism-linked services are carrying growth, while export-oriented manufacturing, particularly apparel, faces softer external orders. That divergence matters for policy. Services strength supports employment and near-term GDP numbers, but Sri Lanka’s foreign exchange earnings and its ability to service external debt still lean heavily on manufactured exports, so a cooling apparel sector deserves closer watching in the months ahead.

Globally, the picture is more favourable, with major manufacturing economies including China, the US and the Eurozone continuing to expand, giving some grounds for demand to stabilise. But with the “Increasing rate of contraction” territory now visible in Sri Lanka’s own Production sub-index, the case for a manufacturing rebound will likely hinge on how the sector fares as it moves through the fourth quarter, when the seasonal upturn the Central Bank flagged is expected to test whether this slowdown is temporary or something more structural.