CBA: Australian Economy Has Lost Momentum

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Author: PASA

Early data shows a decline in services activity outweighed continued growth in manufacturing.

The Australian private sector has dipped into contraction territory for the first time in the CBA PMI survey’s history, new CBA data shows.

The latest “flash” CBA Composite Purchasing Managers Index (PMI) has been released and shows overall business activity has softened in February, amid reports of weaker demand in services and drought conditions.

The headline index fell to 49.7, down from 51.3 in January.

CBA Chief Economist Michael Blythe said: “The dip in the PMI below the 50 line that separates expansion from contraction is a significant event. It indicates a loss of momentum in the Australian economy at the start of 2019. It also underlies a shift in forward guidance by the RBA to a more neutral setting.”

While the services sector saw a reduction in new business, manufacturing new orders continued to rise, albeit at a weaker pace.

“The divergence between contracting service sector activity and expanding manufacturing activity should be noted,” said Mr Blythe. “It shows the slowdown is not broadly based and the more forward-looking components like jobs and business sentiment point to a recovery later in 2019.”

Why are PMIs important?

The PMIs are important because they cover key areas of the economy.

They are part of the global suite of PMI releases published by IHS Markit.

Manufacturing activity tends to be cyclical in nature, so turning points in the CBA Manufacturing PMI can provide early warning signals of turns in the business cycle more generally.

Services activity tends to be less cyclical and is on a long‑run structural uptrend, so the level of the CBA Services PMI is important when assessing the resilience of the Australian economy more broadly.

How are the PMIs calculated?

The PMI surveys cover senior purchasing managers in 400 Australian companies in the manufacturing and service sectors each month. The survey began in May 2016.

Manufacturers are surveyed each month on how output, orders, jobs, delivery times and stocks have changed relative to the previous month.

The survey results are presented as diffusion indexes. These indexes have leading indicator properties and show the direction of change. A reading above 50 indicates expansion. The further above (below) 50, the stronger the expansion (contraction).

The CBA PMI surveys cover manufacturing and services, or close to 75 per cent of GDP [gross domestic product].

The ability to access 80‑85 per cent of survey results earlier means that reliable ‘flash’ estimates can be published sooner. It brings the Australian survey into line with flash estimates for the Eurozone and Japan.

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