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Flash Australia PMI at 26.4, signalling another steep decline
in business activity
Slumping demand accompanies the fall in output
Job losses continue at marked rates
Longer-term confidence improves as lockdown measures ease
across Australia
May saw another substantial fall in business activity across
Australia, setting the scene for a deepening downturn in the
economy during the second quarter. Even as lockdown measures were
relaxed in mid-May, this only contributed to a minor easing of the
rate of contraction in business activity as demand continued to
weaken. This resulted in job losses persisting into May as firms
worried about excess capacity.
However, a bright spot in the flash survey data came from the
longer-term business outlook, as more firms expressed optimism
based on expectations that the COVID-19 situation will improve in a
year's time.
Heading into recession
The Commonwealth Bank Australia Flash PMI,
compiled by IHS Markit and covering both the manufacturing and
service sectors, came in at 26.4 in May, up from April's record low
of 21.7. Since any reading below 50.0 indicates a decline from the
previous month, the latest figure highlighted that private sector
output in May fell substantially further after April's slump,
registering the second-steepest monthly fall in business activity
in the four-year survey history.
The latest figure took the average PMI reading for the second
quarter so far to 24.0, which is over 20 index points lower than
the first quarter average, indicating that the economy has almost
inevitably fallen into a recession.
The service sector again led the downturn in May, with a sharper
reduction of output than manufacturing. The survey showed
widespread declines in various service sub-sectors, including
banking and finance, accommodation and food services, arts and
entertainment, as well as transport, as COVID-19 restrictions
remained in force for the first half of May.
While the rate of decline eased somewhat in services, the
manufacturing decline intensified in May. Production volumes fell
at a survey-record pace as falling demand and shortages of material
inputs constrained output.
Demand and job losses
The impact of COVID-19 measures on demand conditions remained
severe. New orders across both manufacturing and services fell
substantially from the previous month, though the rate of
contraction eased from April's record. Here again, service
providers reported a steeper reduction of new business inflows,
although the decline in factory orders struck a record pace.
Anecdotal evidence indicated that the temporary closure of
customers' businesses, reduced construction activity and general
uncertainty over the duration of the global pandemic had weighed
heavily on manufacturing sales.
With restrictions on movement and business operations, alongside
slumping sales, firms sought to reduce staff numbers in May. Survey
data indicated that employment fell sharply again in the middle of
the second quarter, and at a rate that was near April's record.
This suggested that substantial further job shedding is expected in
May, following nearly
600,000 job losses in April, according to official
statistics.
Rising deflationary pressure
The survey data also brought further signs of deflation in May,
with prices falling for a second straight month, reinforcing the central
bank's view that inflation will turn negative in the June
quarter.
Deflationary pressure was led by the service sector, where rates
of decline in both input and output prices intensified to a survey
record. Service providers generally mentioned that the JobKeeper
payment scheme, government childcare subsidies, lower fuel prices
and redundancies contributed to reduced expenses. This in turn was
passed on partially to customers in the form of lower fees as firms
attempted to stimulate demand.
The manufacturing sector meanwhile reported the first decline in
output prices in the survey history, despite input costs rising
solidly in the month. Wage support schemes and greater competition
led goods producers to cut selling prices amid weak sales, as they
bore the burden of rising costs. Supply shortages and a relatively
weak exchange rate were cited as drivers of cost inflation.
Will we see a recovery?
While the near-term survey indicators signalled an economy stuck
in a deep contraction, longer-term business expectations were much
more optimistic. The Future Output Index, a measure of confidence,
climbed by nearly 15 index points to an eight-month high. Optimism
was largely driven by expectations that the COVID-19 situation will
improve in coming months, accompanied by restrictions being lifted.
Many parts of Australia have already started to relax restrictions
since the middle of May, although some measures to maintain social
distancing remain in place.
That said, the further easing of lockdown measures relies on
there being no resurgence of significant number of new COVID-19
cases. Moreover, the concern is that global demand for goods and
services will remain subdued for some time, in particular if travel
restrictions or self-isolation requirements are kept in place. Such
an outcome will dampen the recovery of Australia's private
sector.
How to read survey indices
April is likely to prove to be a low point as governments around
the world start to relax lockdown restrictions. As we look ahead,
survey indices may move closer to 50 in coming months, but some
caution is warranted when interpreting the PMI figures.
It is worth bearing in mind that a PMI reading of 50.0 indicates
no change in any month from the previous month. So even if the PMI
readings may look V-shaped on a chart, do not be misled. A reading
of 50 merely means that none of the lost output has been recouped.
To see any meaningful recoveries, the PMI needs to be
commensurately higher than 50 to compensate for an equivalent drop
below 50 in the prior month, suggesting that readings of 60, 70 or
even 80 are necessary, given the extent of the declines seen in
recent months.
Final manufacturing and services PMI data will be released
on 1st and 3rd of June respectively.
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.
