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Flash PMI shows Australian economic recovery gain momentum in July
24 July 2020Bernard Aw
Flash Australia PMI rises to highest in over three years
Demand improves, but insufficient to raise capacity
pressure
Business sentiment remains positive as firms eye further easing
of COVID-19 restrictions
Cost inflation eases, while output charges fall
The rebound in the Australian economy from COVID-19 lockdowns
gathered pace in July, with business activity increasing markedly,
according to flash PMI data, adding to hopes that the economy could
return to growth in the third quarter. Survey data also showed
demand improving sharply, leading firms to expect output to rising
further over the next 12 months on balance, especially if COVID-19
containment measures continue to ease.
However, further recovery in the months ahead is by no means
assured. The survey also indicated how external demand for
Australian goods and services continued to deteriorate amid a weak
global trade environment. Firms also remained reticent towards
investing in new capacity as current workloads continued to be
manageable despite a further rise in sales. Prices meanwhile hinted
at weakened inflationary pressures. Input prices increased at a
slower rate, while output charges were reduced on average due to
efforts to maintain competitiveness.
Broadening recovery, led by services
The Commonwealth Bank Australia Flash PMI,
compiled by IHS Markit and covering both the manufacturing and
service sectors, rose sharply from 52.6 in June to 57.9 in July,
indicating the fastest increase in private sector output for over
three years.
Services continued to lead the recovery at the start of the
third quarter. Growth in services activity accelerated to a record
pace during July as the gradual reopening of parts of the economy
following a relaxation of COVID-19 restrictions led to more
businesses returning to work.
Survey data also showed a broadening of the recovery, with
manufacturing output returning to growth in July, ending a
ten-month period of decline. Companies reported that the lifting of
restrictions and resumption of construction activity were factors
behind the rise in factory production.
The rise in overall business activity was accompanied by a
further strengthening in demand. Total new orders rose sharply in
July, with the rate of increase the strongest for three years.
Australian services continued to lead the improvement in demand
while orders for manufacturing products returned to growth.
That said, the upturn in business activity remained driven by
the domestic market while external demand continued to deteriorate.
Export orders for goods and services fell for a sixth straight
month, with the rate of decline intensifying from June, though not
as severe as seen in April and May when lockdown measures were
imposed in many economies globally.
Inflationary pressures ease
Prices charged for Australian goods and services fell slightly
in July on average after a marginal rise in June, in part due to
increased competitive pressures and efforts to offer discounts to
secure sales, notably in the service sector. Manufacturers recorded
a milder rise in factory gate prices than the increase seen in
June.
Input costs meanwhile rose further in July, but the rate of
increase was noticeably softer than in the prior month and modest
overall. Inflation was driven by a number of factors, including a
relative weaker exchange rate, wage increases, higher freight fees
and greater fuel prices.
Further recovery is far from certain
With Australia having overcome the initial impact of the
lockdown measures to control the COVID-19 outbreak, the current
rebound from a deep recession could be undermined by a surge in new
infections. Even though companies remained positive about higher
output in the year ahead on balance, this optimism is founded on
expectations of a further easing of COVID-19 restrictions and an
eventual return to normality.
Other forward-looking survey indicators cast doubts as to the
strength of the recovery ahead. A stronger rise in sales has yet to
result in an increase in capacity pressure. The survey data showed
the level of backlogs little changed from June, as was the case in
the prior month, suggesting that a much stronger pick-up in demand
is necessary to sustain the recovery. Furthermore, with firms
battling to stay in business and seeking to reduce costs,
employment numbers were cut further in July, albeit at the slowest
pace since February. Any further lack of capacity pressures will
continue to dampen labour market prospects.
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.
