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Australia starts fourth quarter on stronger economic footing as COVID-19 curbs ease
23 October 2020Bernard Aw
Flash Australia PMI signals faster output growth in October as
COVID-19 containment measures loosen
Resurgent service sector leads the upturn as manufacturing
expansion slows
Business confidence improves to strongest for just over two
years
Subdued demand remains key concern for upturn stamina
The start of the fourth quarter saw the recovery of the
Australian economy strengthened as business activity picked up
solidly amid a further loosening of social distancing curbs,
notably in the service sector. Flash PMI data showed business
activity increased at the fastest rate for three months. Business
sentiment about the year ahead also improved, rising to the
strongest since August 2018, with services firms particularly
upbeat about future prospects.
Other survey indicators, however, raised questions as to the
durability of the upturn. Demand in particular has not kept pace
with the upturn in overall activity. The key concern is that if
subdued sales growth persists in the coming months, the lack of
capacity pressure could lead to more job losses as firms seek to
control costs in order to remain viable.
Services recovery leads upturn
The IHS Markit Flash Australia Composite PMI,
covering both manufacturing and service sectors, rose 2.5 points
from 51.1 in September to 53.6 in October. The improvement
signalled the fastest increase in private sector output for nearly
a year. This built on the gains registered in the third quarter
(which saw an average index reading of 52.8).
The stronger upturn in the Australian private sector economy
coincided with a further easing of social distancing restrictions,
particularly in Victoria, which benefited the service sector in
particular. Indeed, services business activity rose sharply in
October amid greater consumer confidence and more events permitted
to be held. Overall activity was also supported by further growth
in manufacturing production, though the rate of factory output
expansion moderated from September, in part related to delivery
delays of input materials due to logistical issues.
Subdued demand
Worryingly, the recent increase in demand for Australian goods
and services has not been commensurate with the stronger
performance in private sector output, casting doubts on the
sustainability of the recovery. Orders for goods and services rose
for a second straight month in October, but at a rate similar to
September and one that was only marginal overall, suggesting that
consumption and investment continued to struggle despite loosening
COVID-19 curbs.
Part of the reason for subdued overall demand was linked to
weakness in the external market. Foreign sales of Australian goods
and services remained in decline for the ninth month running in
October amid border restrictions and weak demand at overseas
clients.
The absence of a robust pickup in new business saw firms'
operating capacities rarely tested. On the contrary, backlogs of
work declined further in October, though at the slowest pace for
three months, hinting at excess capacity. With capacity in surplus,
firms continued to reduce their headcounts as part of efforts to
control costs and remain viable. Overall employment fell for a
ninth straight month, with lower workforce numbers seen across both
manufacturing and services, with the former cutting jobs again
after a modest rise in September.
Supply chains under pressure
Suppliers continued to struggle to make timely deliveries at the
start of the fourth quarter, with workers' strikes at ports
contributing to logistical delays. Average lead times lengthened to
the greatest extent seen since the record rates of April and May at
the height of the pandemic.
The delay in receiving manufacturing inputs has had an impact on
production, with some respondents highlighting that output was
reduced due to insufficient materials. A lack of improvement in
supply chains in the coming months could further dampen factory
production.
Cost inflation intensifies
Australian private sector firms meanwhile faced a further
increase in input costs during October, with services reporting a
sharper rate of input price inflation. A larger wage bill due to
reduced government subsidies, alongside greater costs of raw
materials and increased freight fees, all pushed expenses
higher.
Goods producers were able to pass some of the rise in costs on
to their customers, with factory gate prices rising at the fastest
rate for seven months. In contrast, services providers had to
absorb higher expenses and, in some cases, even provide discounts
to stimulate sales amid subdued demand.
Outlook
We expect the recovery in the Australian economy to continue in
the fourth quarter, though the extent of economic growth relies
heavily on demand reviving. Much will in turn depend on whether
social distancing measures can be loosened further, and border
restrictions relaxed. The October survey indicated the strongest
business sentiment for just over two years, underpinned by
expectations of the economy opening up further in coming
months.
That said, rising unemployment, damaged balance sheets and
uncertainty over the global pandemic trajectory could curb private
consumption and investment, thereby undermining the recovery.
The final Australia PMI data will be published on 2nd November
(manufacturing) and 4th November (services and composite).
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
