World's service sector in turbulence

The world's service sector, defined as intangible goods, suffered its weakest growth in 17 months in July, a reflection of dwindling consumer demand for services. The Arizona-based Institute for Supply Management (ISM) that typically surveys around 375 purchasing executives across the country confirmed the fall and in a report revealed its index for services companies fell to 52.7, from 53.3 in June. Any reading above 50 indicates expansion.
A slumping services sector impacted on Wall Street with the Dow Jones Industrial average falling more than 150 points, however a late Wednesday rally reversed earlier losses and the Dow Jones rose by 29 points, thereby ending the seven-day losing streak. The report, as per Dales, an economist at Capital Economics, suggests that "the economy is not slipping into a recession but instead that growth is very weak."
A fall in demand for services was attributed to a decline in consumer demand which accounts for 70 percent of economic activity and which fell by 1.9 percent in June for the first time since September 2010. However, the slowing down of growth in the services sector in the US was mirrored by a similar slowdown in Europe. The reason: the debt crisis of the Eurozone countries with Italy the latest victim of increased tumult in its economy due to indebtedness approaching unsustainable levels. However, unlike Spain and Greece, the Italian economy as the third largest in the Euro zone is considered too big to benefit from the existing Eurozone rescue packages and this has raised alarm throughout the world.
What is significant is that China's service sector too has suffered a decline attributed mainly to tight monetary policy. According to Qu Hongbin, an economist at HSBC, "Service sector activity growth moderated in July, reflecting the effect of monetary tightening and property cooling measures." However, there was one country in the world whose service sector witnessed a three-month high in July, even though the country's central bank also followed a tight monetary policy: India with a services sector with a 55 percent share in the country's Gross Domestic Product (GDP). The double-digit growth in the Indian services sector is, according to economists, a direct outcome of the fact that government expenditure is part of services. Thus, the major reason why the services sector was not affected by the global financial crisis was because "community and personal services", which include government spending, increased by 12.7% in 2008-09, compared with 6.9% in the previous year. Growth in this segment remained very high in 2009-10 as well.
Pakistan's service sector accounted for over 53 percent share in the GDP last year. Its major contributors were wholesale and retail trade (17 percent), followed by social services (11.6 percent). Transport, storage and communication accounted for 10.2 percent share of the GDP. Finance and insurance accounted for 5.4 percent, while public administration and defence accounted for 6.3 percent share in the GDP. In short, we lag behind India in terms of contribution of the transport sector (including the railways), finance and insurance to the GDP as well as in social services. The reason for this shortfall is the continued paucity of government funds which has led to a perennial struggle to sustain the budgetary deficit within limits acceptable to the International Monetary Fund with the overall objective of reactivating the stalled Stand-By Arrangement. In marked contrast, India has no such constraints and its economy remains recession-free.
What is the way forward? Business leaders at the Asia Pacific Service Sector Conference in Guangzhou, capital of Guangdong province, called for closer communication, better co-operation in logistics, finance, e-commerce, sharing of technologies and talent training. The Australian participant argued that his country's success in developing a services sector is attributable to a mature financial system that caters to market demand while a Hong Kong participant referred to the need for the government to provide an appropriate environment to promote service sector - an environment that must include proper supervision and a just and fair legal system and an optimised market system, neither of which conditions are evident in Pakistan of today. The road is arduous but like in other aspects of our economy there appears to be little if any political will to make a difference.