Obtain the data you need to make the most informed decisions by accessing our extensive portfolio of information, analytics, and expertise. Sign in to the product or service center of your choice.
Australian economy stabilises, led by further gain in manufacturing output
23 September 2020Bernard Aw
Flash Australia PMI signals a rise in output in September after
a decline in August
Dual-speed economy, led by manufacturing while service sector
lags due to social distancing measures
Falling backlogs and jobs remain key concerns
Positive sentiment hinges on further easing of containment
measures and no new waves of infections
Flash PMI data showed signs of stabilisation of the Australian
private sector economy at the end of the third quarter, with
activity and sales increasing marginally in September after falling
in August. However, other survey indicators suggest that the
rebound may lack momentum going forward. In particular a further
drop in backlogs of work may dampen output growth in the coming
months unless a more robust recovery in demand emerges.
Rising input costs also added to private sector woes, pressuring
firms, especially those operating in services, to step up efforts
in controlling expenses to remain viable, often resulting in job
cuts. Meanwhile, detailed survey data showed diverging performance
between manufacturing and services, with the recovery in the latter
dampened by renewed containment measures in parts of the
country.
Manufacturing leads the recovery
The IHS Markit Flash Australia Composite PMI,
covering both the manufacturing and service sectors, rose just one
point from 49.4 in August to 50.5 in September. That said, by
registering above the no-change 50.0 level, the latest reading
indicated a marginal increase in private sector output, bringing
welcome signs of stabilisation after a brief slide back into
contraction in August. Furthermore, the average PMI reading for the
third quarter (52.5) not only showed a marked improvement from the
severe downturn seen in the second quarter (34.2), but also
represented the first quarterly growth for a year.
The overall upturn in the Australian private sector economy was
driven by a sustained recovery in the manufacturing sector during
September. Production and sales both rose solidly, with the latter
increasing at the sharpest pace since January 2019, supported by
renewed growth in export orders.
The loosening of containment measures in Victoria meanwhile
provided some relief to the service sector, which was much more
affected by renewed social distancing restrictions when compared to
manufacturing. The survey indicated that the service sector as
broadly stable in September, with business activity unchanged from
August. New orders received by service providers also steadied
following a solid drop in the middle of the third quarter.
Although external demand for Australian goods and services
weakened at the softest rate in the current eight-month sequence of
decline, border restrictions and containment measures continued to
weigh on the service sector in particular, with services export
orders falling sharply again in September.
Employment divergence
With the widening performance gap in business activity and sales
between manufacturing and services, their employment trends also
diverged in September. Cuts to workforce numbers were limited to
the service sector, while manufacturers added more workers. Factory
employment rose for the first time in ten months, increasing at the
fastest rate since early 2019 amid a growing lack of operating
capacity.
By contrast, services firms not only reported a further drop in
workforce numbers, but also the fastest pace of job shedding since
the height of the pandemic in April and May. This underscores the
challenges that service providers, especially in consumer services,
face in terms of operating costs, damaged finances and weak
demand.
A major driver of job creation is capacity pressure. The strong
increase in manufacturing sales during September contributed to a
sharp rise in the level of backlogs among Australian goods
producers, thereby putting pressure on their operating capacities.
This in turn boosted hiring as factories sought to invest in new
capacity to cope with rising production requirements.
The picture in the service sector is quite different, with
demand conditions remaining subdued, leading to a further easing of
capacity pressure in September which, in turn, weighed on the
services labour market.
Rising input costs
Australian private sector firms faced a further increase in
input costs during September, with manufacturing reporting a
noticeably sharper rate of input price inflation due to greater
costs of raw materials and increased freight fees. Goods producers
were able to pass some of the rise in costs on to their customers.
On the other hand, services providers not only had to absorb higher
expenses amid subdued demand, but anecdotal evidence suggested that
some firms even provided discounts to boost sales.
Outlook
Looking ahead, the September survey saw optimism about the
coming 12 months rise to a two-year high, with much of the optimism
riding on expectations of a further easing of containment measures
in the coming months. Other survey indicators, including backlogs
and employment, point to a challenging economic recovery ahead, one
that is likely to progress in a stop-start manner as the course of
the pandemic trajectory globally remains uncertain in the absence
of an effective and widely available treatment or vaccine.
The prospect of rising unemployment would curb household
confidence, and therefore private consumption, which will dampen
the pace of recovery. Investment activity may also be constrained
by economic uncertainty, though government infrastructure spending
will lend some support to investment.
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.
