Commonwealth Bank of Australia

08/22/2019 | Press release | Distributed by Public on 08/22/2019 02:16

Australia ‘caught’ in US-China trade war: CBA ‘flash’ PMI

Early data for August shows first decline in business activity since March.

A decline in business activity across Australia's services sector has led to the first reduction in Australian private sector output since March 2019, and only the third reduction since data was first collected in May 2016, according to CBA data released today.

Commenting on the latest 'flash' CBA Composite Purchasing Managers Index (PMI) for August, CBA Chief Economist Michael Blythe said: "A persistent concern is that the fallout from the US-China trade war will dent global capex and consumer spending as cautious businesses and households retreat to the sidelines. The shift back into contractionary territory in the CBA Flash PMI reading for August indicates that Australia is not immune to these global risks."

In August, the headline index fell to 49.5, down from 52.1 in July - with readings below 50.0 signalling a deterioration in business activity on the previous month. The overall reduction in August is centred on the services sector, with a lack of confidence in the Australian economy and drought conditions contributing to lower activity.

With employment returning to growth and business sentiment picking up, Mr Blythe confirmed that "the concerns about weak output readings are tempered a little by positive indications on the labour market and future business expectations."

Mr Blythe added: "The challenges faced by the RBA in their attempts to return inflation to the 2-3% target band are also highlighted in the survey. The lower Aussie dollar is putting upward pressure on input prices. But the competitive trading environment is limiting the flow through to output prices."

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.

Read the latest flash PMI report.