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Australian PMI surges into recovery in June, but growth challenges remain
23 June 2020Bernard Aw
Flash Australia PMI jumps to 52.6 in June, up from 28.1, but
signals only a mild rise in business activity
Demand stabilises but job shedding persists
Business sentiment at nine-month high on hopes of further
improvement in the economy
Inflationary pressures return
Amid an easing of COVID-19 restrictions, business activity in
the Australian economy returned to growth during June, according to
flash PMI data, adding to recovery signs after four months of
contraction resulting from the pandemic. While the data will fuel
hopes that the economy could return to growth in the third quarter,
the latest data represent only a relatively mild upturn compared to
the unprecedented declines recorded in recent months. Looking
ahead, further recovery could be constrained if a paucity of demand
persists in the coming months.
Firms expect output to rise over the next 12 months as they
continue to emerge from lockdown. Despite this improved sentiment,
companies remained reluctant to invest in new capacity, as sales
remained subdued. Employment fell further as operating capacity
remained in surplus compared to the pre-pandemic period. Prices
meanwhile rose for the first time in three months after steep falls
in April and May, in part due to rising costs but also hinting at a
tentative welcome return of pricing power.
Services-led recovery amid reopening
The Commonwealth Bank Australia Flash PMI,
compiled by IHS Markit and encompassing both the manufacturing and
service sectors, surged by nearly 25 index points to 52.6 in June,
up from 28.1 in May. By breaking above the 50.0 no change level,
the latest figure indicates an increase in business activity for
the first time since January, though the upturn is insufficient to
prevent the economy from falling into a recession during the second
quarter.
At 34.1, the average PMI reading for the three months ending
June is by far the lowest ever recorded since the survey began in
May 2016 and indicative of a steep fall in GDP. However, more
encouragingly, the rise in the PMI into expansion territory in June
bodes well for the economy to return to growth in the third
quarter, adding to expectations that the recession may have been
shockingly deep, but also looks to have been welcomingly brief.
The survey also brought signs of a divergence in sectoral
performance during June, with the easing of the COVID-19
restrictions primarily benefiting the service sector.
The rise in overall business activity was driven by a rebound in
the service sector, reflecting the improvement in domestic demand.
Services activity rose for the first time in five months,
increasing at the fastest rate for just over two years.
By contrast, manufacturing output fell for a tenth straight
month though the rate of downturn eased notably from the steep
declines seen in April and May.
Domestic demand drives upturn
The upturn in business activity was fuelled by pent-up domestic
demand while the external sector continued to deteriorate. Total
new order books grew for the first time since January, though the
rate of increase was only marginal. While restrictions have been
relaxed since late May, some social distancing measures remained in
place, such as limits on large public gatherings and quarantine
orders for interstate travellers in some states. By sector, demand
for Australian services rose only mildly in June, while orders for
manufactured products continued to fall.
Meanwhile, export sales declined further in June, marking a
fifth consecutive month of contraction. The downturn in global
trade and the ongoing closure of Australian borders continued to
weigh on foreign demand for Australia goods and services.
Manufacturing and service sectors both recorded further
contractions in new exports, with the latter again posting a
sharper decline, linked to the collapse in tourism.
Inflationary pressures return
The expansion of business activity was accompanied by a rise in
price pressures. Input costs increased for the first time in three
months during June, with the rate of increase solid and contrasted
with the previous two months of steep declines. Inflation was
driven by a combination of factors, including increased transport
costs, supplier fee hikes, greater raw material prices, and a
weaker Australian dollar. Higher input expenses were reported in
both manufacturing and service sectors, but the former had
registered a notably faster rate of inflation. In fact, factory
costs rose at the quickest pace for two years. Anecdotal evidence
showed that prices for base metals, chemicals, plastics, paper,
food items and fuel had all risen in June since the prior
month.
In response, firms raised their selling prices for the first
time since March. However, the rate of increase was only modest,
reflecting that subdued demand continued to constrain the pricing
power of companies.
Gradual recovery amid challenges
As the country moves towards the final phase of a three-stage
plan of eased restrictions in coming months, the PMI should rise
further. Indeed, business expectations of higher output in the year
ahead rose in June to the highest for nine months, though firms
mentioned that their projected increase in activity stemmed from a
low base after several months of substantial falls due to lockdown
measures. This suggests that, in order for the recovery to be
meaningful, the PMI needs to be commensurately above 50 (60 or even
70), to offset the steep contractions recorded in April and
May.
Forward-looking survey indicators point to a challenging
recovery in the months ahead as firms continue to rebuild from the
devastating hit to the economy. While the decline in demand has
bottomed out, an absence of a stronger pick-up in sales will limit
the extent of the recovery.
The labour market meanwhile continued to deteriorate as
operating capacity remained in excess compared to pre-pandemic
levels. Survey data showed employment fall further in June, and
further job losses will lead to a weakening consumption trend,
thereby acting as a dampener on recovery momentum. Official data
indicated that the unemployment rate rose to a 19-year high of 7.1%
in May, with over 824,000 jobs lost in April and May.
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.
