Business activity grows as optimism about economic conditions improves, according to initial results of the latest CBA Purchasing Managers Index.
The latest Commonwealth Bank ‘Flash’ Purchasing Manager Index (PMI) points to a return to growth of Australian private sector output in June as coronavirus restrictions are loosened. The increase was centred on the services sector, which saw a rise in activity for the first time in five months while manufacturing production continued to fall, although at a much softer pace.
The return to growth in June comes as the easing of coronavirus restrictions saw the resumption of operations at many firms.
Services business activity increased in June as operations resumed and customer demand increased while the manufacturing sector experienced much softer reductions in output, pointing to a stabilisation as new orders and exports were recorded.
Optimism that the worst of the disruption from the coronavirus pandemic has passed, and that operating conditions will now gradually return to normal, contributed to increased confidence in the 12-month outlook. Sentiment was the highest in nine months, with optimism strengthening across both the manufacturing and services sectors.
The headline Commonwealth Bank Flash PMI Index in June was 52.6, up significantly from 28.1 in May, with the Flash Services Business Activity Index at 53.2, up from 26.9 in May, and Flash Manufacturing PMI at 49.8, up from 44.0 in May. Readings above 50.0 signal an improvement in business activity on the previous month, while readings below 50.0 show deterioration.
CBA Head of Australian Economics, Gareth Aird said: “The June results indicate we are now past the lowest point in economic activity. Overall conditions are still very soft, but there were some encouraging signs about further improvements still to come.”
While new business for companies stabilised, employment decreased for the fifth month running, although the rate of job cuts softened. The extent to which conditions continue to stabilise and improve will be closely tied to how effectively coronavirus infection rates are contained and people comply with health and safety advice.
“The further decline in employment was disappointing, but given the lagging relationship between employment and output it is not surprising. We should see headcount lift from here,” Mr. Aird said.
PMIs provide reliable advance indications of economic growth, employment and price trends. The CBA ‘flash’ PMI is based on around 85 per cent of final survey responses and final indices for June 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 services 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.
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.