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Flash Australia PMI signals a decline in output during August
after two months of solid growth
Renewed downturn led by services
Job shedding persists
The Australian private sector economy fell back into decline
during August, according to latest flash PMI data, with business
activity contracting following two months of solid growth. The
downturn in overall activity coincided with renewed
coronavirus-related restrictions in parts of the country that
disrupted business operations and weighed on demand, particularly
in the service sector.
The survey also indicated a rise in spare capacity as sales and
production requirements dropped, dampening the job market further.
All these trends hint at a challenging recovery ahead, especially
if social distancing measures are extended or imposed in more parts
of Australia. Prices meanwhile indicated rising inflationary
pressures, in part fuelled by supply chain disruptions due to the
new restrictions.
Re-imposed measures hit services
The Commonwealth Bank Australia Flash PMI,
compiled by IHS Markit and covering both the manufacturing and
service sectors, fell nine points from 57.8 in July to 48.8 in
August. By registering below the no-change 50.0 level, the latest
reading indicated a modest decline in private sector output. This
reduction followed two months of solid growth.
The return of lockdown measures in Victoria following a surge in
new infection cases coincided with business activity falling back
into decline. The state of Victoria holds the second-largest share
of the Australian economy, accounting for nearly a quarter of
GDP.
Renewed restrictions to control the spread of the coronavirus
dealt an immediate blow to the service sector, while manufacturing
was noticeably less affected. The survey showed a divergence in
economic trends between the two monitored sectors, with services
activity and sales falling after two months of expansion. By
contrast, manufacturing output and sales continued to rise, albeit
at slower rates.
External demand continued to weaken amid ongoing border
restrictions and subdued global demand. New export orders fell
further in August, with the rate of decline the quickest since the
height of the COVID-19 downturn in April and May. Reduced foreign
demand was seen across both sectors.
Job shedding persisted in the middle of the third quarter as
lower sales contributed to a build-up of spare capacity. Employment
shrank for the seventh month running during August, with the rate
of contraction the sharpest for three months. Business closures,
redundancies and the non-replacement of leavers were highlighted by
respondents as reasons for the fall in employment. In addition,
some firms mentioned that renewed curbs on business operations in
Victoria had also led to job cuts. Official data showed the
unemployment rate rising to 7.5% in July, the highest in 22
years.
Manufacturing output expands further
Australian goods producers were in better shape than their
service sector counterparts during August, with production
continuing to rise. However, the survey brought signs that
sustaining the recovery in the months ahead could be challenging.
Inflows of new orders rose at a noticeably slower pace at
manufacturers, and one that was insufficient to maintain a further
rise in the level of work-in-hand (but not yet completed). After
rising in July, backlogs of work fell solidly in August, hinting
that production volumes in the coming months may slow or even
decline in the absence of a robust pick-up in demand.
The lockdown in Victoria also had an impact on supply chains.
Delivery times lengthened further in August, with the rate of
increase severe and surpassed only by the record rates seen in
April and May. Greater demand for inputs, freight limitations and
border restrictions (or closures in some cases) disrupted the
ability of suppliers to meet their obligations, according to
anecdotal evidence.
Rising prices
Input costs rose across both monitored sectors, with
manufacturing firms reporting a sharper increase. Higher freight
costs, greater prices for fuel and materials such as copper, as
well as supplier price hikes were factors driving inflation. In
order to help cover some of their costs, firms raised their selling
prices, albeit only marginally. Some companies actually reduced
prices amid rising competition.
Recovery depends on pandemic trajectory
The economic recovery will be determined by infection numbers
and associated containment measures. Despite the renewed drop in
private sector output, companies remained positive about future
output, with confidence stemming from expectations of a further
recovery from the COVID-19 downturn. However, there remained
concerns around the longer-term impact of the pandemic on economic
activity as well as supply chain disruptions and the reduction in
government funding support.
The ongoing decline in employment also remains a major concern.
With firms still struggling to boost sales and control costs, the
rise in spare capacity will lead them to reduce staff numbers
further. While the extension of the government's job retention
programme (JobKeeper) to March next year could help slow the rate
of job losses, any extended (or broadening) virus related
restrictions in the economy, alongside border controls, will dampen
the job market further and weigh heavily on consumption, thereby
undermining the recovery.
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.
