Subdued demand, coronavirus and bushfires behind the continued reduction in activity, according to initial results of CBA’s monthly Purchasing Managers Index.
Early data has signalled a renewed fall in business activity in February across both the services and manufacturing sectors, with the latest ‘flash’ CBA Composite Purchasing Managers Index (PMI) underlining the impact of the bushfires and coranvirus on key parts of the economy.
Details released today show that business activity in the services sector fell for the third time in the past four months and at the quickest rate on record in the index’s four year history. Business conditions across Australia’s manufacturing sector also deteriorated for the fourth successive month, albeit only slightly.
CBA Senior Economist Gareth Aird said: “The February ‘flash’ results imply a contraction in private demand. Whilst this is clearly a disappointing result, it is not altogether surprising given the two negative shocks that have hit the Australian economy – the bushfires and the coronavirus.”
In February the Flash Composite Output Index was down to 48.3 from 50.2. Readings below 50.0 signalling a deterioration in business activity on the previous month.
Mr Aird noted: “Our main concern is that these events have hit the global and local economies at a time when domestic demand was already soft. The level of both the services and manufacturing PMIs highlights the need for more policy stimulus.
“With monetary policy doing most of the heavy lifting, an easing in fiscal policy continues to look the most appropriate response to support aggregate demand.”
The CBA ‘flash’ PMI is based on around 85 per cent of final survey responses and final indices for February will be published in approximately one week.
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.