Australian PBI: Fall in business conditions eases in May

The Australian Industry Group Australian Performance of Business Index (Australian PBI) lifted by 4.5 points to 31.8 in May, pointing to a further serious contraction in activity in May but at a slower pace than April’s record low (results below 50 points in the Australian PBI indicate deteriorating business conditions, with lower numbers indicating a faster pace of deterioration in the month).

Business conditions remained deeply impacted by the pandemic and distinctly negative across almost all sectors of the economy in May. Rare spots of stability are evident in food, grocery and medical manufacturing, wholesaling and retailing.

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Ai Group Chief Executive, Innes Willox, said: “Business conditions worsened in May with production, employment and new orders all contracting further in the month. Conditions deteriorated in each of the major areas of activity covered by the Australian PBI – services, construction and manufacturing. While these falls come on top of the very steep drops recorded in April, the pace of decline eased in May. Some of the lower pace of contraction is due to the support being provided to households and businesses, with May being the first month in which businesses received JobKeeper payments. Even with these levels of support the production index was very weak at 28.2 and employment somewhat less extreme at 35. While the falling level of new orders points to further disappointing news in coming months, the gradual removal of restrictions and the further income support in the pipeline should help in rebuilding confidence and spending by consumers and businesses alike,” Mr Willox said.

The Australian PBI is a weighted composite of Ai Group’s Australian Performance of Manufacturing Index (Australian PMI®), Australian Performance of Services Index (Australian PSI®) (released today and available at this link), and Australian Performance of Construction Index (Australian PCI®).

Australian PBI Key findings for May

The Australian PBI rose by 4.5 points to 31.8 in May (all figures seasonally adjusted). This further severe contraction in activity is at a slower pace than in April, which was a record low for this data series.

The PBI production / activity index lifted by 3.4 points to 28.2 points in May. Across all of the sectors that are included in the PBI, only the ‘food and beverages manufacturing’ and ‘chemicals & related manufacturing’ sectors have not reported large sudden drops in activity in April and May.

The PBI employment index rose by 6.2 points to 35.0 in May, indicating further large falls in employment in Australian businesses.

The PBI new orders index rose by 7.0 points to 30.1 in May, indicating further large falls in orders. While some consumer-oriented sectors and locations are preparing for easier activity restrictions, other large industrial and commercial sectors (including construction, heavy manufacturing and professional services) are reporting further declines in new orders from regular customers and few signs of new customers. The PBI supplier deliveries index fell a further 0.5 points to to 32.6 points in May, its lowest level since 2009.

The PBI capacity utilisation index improved by 2.1 percentage points to 70% of existing capacity (on average) across all business sectors, after falling to a record low of 67.9% in April. This index has an inverse historical correlation to the national unemployment rate. Exceedingly low capacity utilisation suggests unemployment will continue to rise from here.

The PBI input prices index fell by a further 0.6 points to 62.5 points in May, further unwinding the price spikes reported in March. This reflects deflationary cost pressures as local and global demand falls.

The PBI selling prices index fell by a further 1.9 points to a new low of 37.7 points in May. This reflects a virtual collapse in local sales for many businesses and mounting deflationary pressures. The RBA expects headline inflation (CPI) to have turned negative in Q2 of 2020 and for prices to rise by an average of just 0.25% over the year to December 2020.

The PBI average wages index recovered by 7.9 points to 45.4 points in May, after hitting a record low in April. This suggests further falls in wages paid, but it does not explicitly include the Jobeeper wage subsidy. The ABS estimates that 55% of all businesses were accessing Jobkeeper by 22 May, in order to support their eligible workers’ incomes.

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