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Services are ‘Achilles heel’ for recovery

Lachlan Maddock
— 1 minute read

Weakness in the services sector is threatening the recovery globally despite “buoyant” PMIs raising hopes for a V-shaped rebound.

While consumption of goods has increased substantially in a number of advanced economies, sectors dependent on “social consumption” remain at risk from social distancing measures and lockdowns, according to Oxford Economics. 

“A significant concern for the months ahead is that firms keep on shedding labour even as economies gradually open up,” Oxford Economics said in a research note. “This may reflect several factors – a risk-averse attitude to the future, a belief in specific sectors that they will be smaller in size in the long-term, and the withdrawal or scaling back of employment and wage subsidies that have preserved jobs until now.”

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That extended labour shedding could be a “significant drag” on the recovery, with some of the worst-hit sectors – including hospitality – being the most labour-intensive. 

“The weakness of some services sectors could be a significant medium-term drag on the recovery given their size – a point we have repeatedly made,” the researcher said. 

Another long-term concern is the potential for banks to withdraw some of their credit support for retail and corporate customers as financial stress builds and loan loss provisions rise. 

“Central bank surveys of bank credit standards for Q3 showed a shift into restrictive territory in the eurozone and – most strikingly – in the US,” the researcher said. “In the US, a net 71 per cent of banks tightened standards for corporate borrowers in the latest Fed survey, suggesting a similar degree of credit restriction to that seen in the global financial crisis.”

 

Services are ‘Achilles heel’ for recovery
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