Bushfires and some fundamental weakness in the Australian economy are behind the PMI decline but it's not all gloom, according to our Chief Economist.
Early data points to a continued decline in Australian business activity in January, with the latest 'flash' CBA Composite Purchasing Managers Index (PMI) showing a sharp fall in output across the manufacturing and services sectors.
CBA Chief Economist Michael Blythe said: "The January "flash" results show the softness in the Australian economy at the end of 2019 has spilled over into the early part of 2020."
In January the Flash Composite Output Index was down to 48.6 from 49.6, with readings below 50.0 signalling a deterioration in business activity on the previous month.
"There is some fundamental weakness in the Australian economy associated with consumer constraint, the residential construction downturn and the reluctance of business to invest. But the PMI results are also being influenced by the terrible bushfires around the country," said Mr Blythe.
Mr Blythe said the PMI results align with earlier CBA analysis that suggests business disruption from the bushfires will see some activities delayed or deferred with flow-on to sentiment, particularly in regional areas and the tourism industry.
"At this stage the impact seems to be mainly through disruption to supply chains. Supplier delivery times have increased sharply," said Mr Blythe.
Mr Blythe also noted: "The gloom should not be overstated however. Key leading indicators like new orders are showing a notably stronger result than the 'headline' PMI readings. Expectations about future business remain at encouraging levels".
The CBA 'flash' PMI is based on around 85 per cent of final survey responses and final indices for January will be published in approximately one week.
Read the latest 'flash' PMI report.
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.
