Trade tensions impact Aussie business conditions

Business activity softens in October, according to early data from CBA.

Early data for October released today by CBA points to subdued business conditions in Australia amid a backdrop of ongoing trade tensions, according to CBA Chief Economist Michael Blythe.

Commenting on the latest ‘flash’ CBA Composite Purchasing Managers Index (PMI) for October, Mr Blythe said: “The trade war and other uncertainties mean businesses are deferring capex and consumers are putting off spending. The resulting drop in production has pulled global manufacturing PMI’s lower, taking services PMI’s along for the ride.”

“Australian manufacturing and service firms are not immune to global trends and the ongoing weakness in the flash PMI readings for October should be judged against this backdrop,” Mr Blythe added.

The early data highlights that although business activity increased for the second month running in October it grew at a slower rate compared to last month. Business activity is rising at a softer pace amid the weakest growth in demand for new business since April.

The Flash Composite Output Index was down to 50.7 from 52.0 in September, with both the rate of growth in services and manufacturing activity softening in October, from 52.4 to 50.8 and 50.3 to 50.1 respectively. Readings above 50.0 signal an improvement in business activity on the previous month and those below 50.0 show deterioration.

Softer business activity aligns with the October edition of CBA’s Household Spending Intentions (HSI) series released last week which showed spending intentions remaining subdued.

Mr Blythe also noted: “Australia is faring a little better than the global trend. PMI readings remain in expansion territory, albeit just. Employment is still growing and longer-run expectations are still positive”.

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.

Read the latest flash PMI report.

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