Early data indicates the RBA’s “gentle turning point” for the economy remains elusive, according to CBA Chief Economist Michael Blythe.
Early data for December released today by Commonwealth Bank points to a further marginal decrease in business activity across the manufacturing and service sectors in the final month of 2019. It is the second time that both have seen a contraction in the same month since the surveys began in 2016.
Commenting on the latest ‘flash’ CBA Composite Purchasing Managers Index (PMI) for December, CBA Chief Economist Mr Blythe said: “The PMI readings indicate that the Australian economy ended 2019 on a soft note. The RBA’s “gentle turning point” for the economy remains elusive.
“And the weakness in private spending evident in the Q3 GDP data looks to have continued in Q4, with a flow on to labour demand as well. There were also some early indications that the disruptions associated with the terrible bushfires around Sydney and elsewhere are having some impact”.
The Flash Composite Output Index was down to 49.4 (from 49.7 in November), with the rate of growth in both services and manufacturing activity decreasing slightly in December (down from 49.5 to 49.7 and from 49.4 to 49.9 respectively. Readings above 50.0 signal an improvement in business activity on the previous month and those below 50.0 show deterioration.
Mr Blythe also noted: “New orders continue to rise, however, indicating a degree of resilience in the domestic economy. The rise in new export business also indicates a degree of resilience to the sluggish global backdrop”.
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.