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Divergence in employment conditions seen between manufacturing
and services
Price pressures ease but supply constraints persist
The flash IHS Markit Australia composite PMI output index,
covering both services and manufacturing, slipped from 56.7 in June
(final reading) into contraction at 45.2 in July, bringing a
10-month growth streak to an abrupt end.
Perhaps of little surprise, the reimposition of COVID-19
lockdown measures covering approximately half of Australia's
population into July played a primary role in dampening business
conditions in the country. The measures, introduced in response to
the spread of the more infectious Delta variant, were extended to a
greater number of Australian states into end-June, and it remains
uncertain as to when these restrictions will eventually be
lifted.
Australia service sector hit by lockdowns
Although both manufacturing and services output indices fell
sharply, manufacturing production managed to sustain growth, albeit
at the slowest pace since output growth recommenced in July 2020.
Anecdotal evidence suggested that firms related to the mining and
building industries were most likely to report positive demand and
output conditions.
Services business activity meanwhile plunged into contraction
for the first time in 11 months and printed the lowest reading
since May 2020 amid the reimposition of widespread lockdowns in the
country. Demand for services and the level of outstanding work also
declined from June, reflecting the toll taken on the service
sector.
Services employment growth falls while manufacturing
hits record
While output across both manufacturing and services were weighed
down by the renewed COVID-19 disruptions, employment indices
notably reflected diverging trends in July.
Certainly, the lockdowns affecting demand for services had
helped to cool the sector's employment crunch, but manufacturers
largely shrugged off the current disruptions and continued to hire
at a survey record pace. Some anecdotal evidence suggested that
manufacturers also continued to experience difficulties in hiring,
reflecting the tight labour market conditions at least across the
manufacturing sector, although it is also the smaller of the two
sectors.
Any extension of the lockdowns into the coming months is
expected to continue dampening services activity, which further hit
Australia's economic growth in the third quarter. As it is,
services employment remained in growth in July, but may well be at
risk for further declines should the lockdowns continue for longer.
This is also with the vaccination rate still lagging the world's
average, a differentiating factor that would be crucial for the
restoration of both consumer and workers' confidence amid the
presence of the more infectious Delta strain.
Output price pressures ease faster than input cost
inflation
Alongside the contraction of output and demand, the July survey
was notable in recording an easing in its price gauges. While
welcome as a leading indicator of softer inflationary pressures, a
worrying aspect was a quicker rate of decline in output charges
compared to input costs for firms, which points to a further strain
on margins. The extent to which input price inflation exceeded
output price growth was in fact the greatest since November
2019.
At the same time, supply constraints remained a prevalent issue
in July, which is evident across both panellists' comments and the
severe rate at which suppliers' delivery times continued to
lengthen for manufacturers. The deterioration of COVID-19
conditions was a key factor adding fuel to the fire for the supply
crunch.
Looking ahead, the ramping up of the vaccination rate may well
be the one differentiating factor in supporting relatively better
economic recovery amid the spread of the Delta variant around the
world, and Australia is playing catch-up here as it seeks to
alleviate some of the strains from the renewed lockdowns magnified
in July.
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.
