Australian Economy Insights

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Author: PASA

The Commonwealth Bank has launched the first Flash Purchasing Managers’ Index for Australia. The index will be published monthly, approximately one week before final PMI data are released worldwide, making the Flash PMI the earliest available indicator of private sector business conditions in Australia. The Flash will be based on approximately 85% of total PMI survey responses.

The move reflects the need for up‑to‑the minute data on the economy. The CBA PMI surveys cover manufacturing and services, or close to 75% of GDP. The ability to access 80‑85% 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.

The manufacturing and services sectors appear to be on a diverging path in the early part of Q4. Both sectors are expanding. But while manufacturing is turning up again, service activity edged lower again. Both sectors are reporting strong jobs growth, however. And new orders continue to lift. The outlook for the remainder of 2018 is still positive. One emerging concern to monitor is that some respondents see downside risks from greater regulation of the finance sector.

The lift in business capex over the past year appears to have eased earlier capacity constraints. Measures of the backlog of work have fallen and now sit at neutral levels. Nevertheless, input and output prices are rising at a solid pace. Higher fuel prices and staff costs are still flowing through. And the recent drop in the AUD appears to be having an impact as well.

The PMI’s: why are they important?

The PMI’s 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 warnings 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.

The PMI’s: how are they 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).

Key findings:
The Australian private sector continued to see output rise during October, but the rate of growth was only slight. In fact, the latest expansion was the weakest in the survey’s two-and-a-half year history. The slowdown was centred on the service sector, where activity rose only marginally. Meanwhile, manufacturing firms signalled a further solid expansion in production. New order growth also eased at the start of the final quarter of the year, but the rate of job creation accelerated.

Commenting on the Commonwealth Bank Flash PMI data, CBA’s Chief Economist, Michael Blythe, said: “The manufacturing and services sectors appear to be on a diverging path in the early part of Q4. Both sectors are expanding. But while manufacturing is turning up again, service activity edged lower again. Both sectors are reporting strong jobs growth, however. And new orders continue to lift. The outlook for the remainder of 2018 is still positive. One emerging concern to monitor is that some respondents see downside risks from greater regulation of the finance sector”.

Mr Blythe added: “The lift in business capex over the past year appears to have eased earlier capacity constraints. Measures of the backlog of work have fallen and now sit at neutral levels.
Nevertheless, input and output prices are rising at a solid pace. Higher fuel prices and staff costs are still flowing through. And the recent drop in the AUD appears to be having an impact as well.”

Please follow this link for the full report (article does not require login): EconomicUpdate-24-Oct-2018-0900-1.pdf.

 

 

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