It looks like the Australian economy is experiencing a bit of a cooldown, according to recent data from Judo Bank. The purchasing managers index (PMI) for August has shown a noticeable drop, with the composite PMI output index dipping below the 50.0 mark, sitting at 47.1 – indicating a solid reduction in activity within the private sector.
Interestingly, this decline in business activity is picking up speed at the fastest rate since January 2022. This aligns with signals from the Reserve Bank of Australia, suggesting that the era of interest rate increases might be on pause. This is all happening against the backdrop of a broader slowdown in Australia’s economy, which is being made a bit more concerning by signs of a similar slowdown in China.
Warren Hogan, the chief economic adviser at Judo Bank, has pointed out that these flash PMI readings are additional proof that Australia’s economy is currently experiencing a cyclical slowdown. He noted that both the output and new orders indexes have dropped for two consecutive months now, showing that this slowdown has persisted even during the winter months.
It seems that the services industries, which were previously quite robust, are the ones experiencing the most rapid loss of momentum in activity over the past three months. On the other hand, the manufacturing sector seems to be holding steady, with activity readings just below the neutral 50 level.
Interestingly, despite the economic cooling, businesses are actually ramping up their hiring efforts. The employment index for August is comfortably above neutral, indicating that there’s still a strong demand for labor.
And speaking of inflation, the data from Judo Bank suggests that the trend of declining inflation, which was noticeable throughout 2022, has come to a halt in 2023. Both input prices and final price indexes have stopped falling in the last six months, and final prices remain elevated – actually hinting at a potential future inflation rate of at least 4%, well above the Reserve Bank of Australia’s target range of 2% to 3%.
Hogan cautions that it might be too soon to be certain that wage pressures won’t exceed the RBA’s projected 4% annual growth for 2023. Despite these economic shifts, businesses are maintaining a positive outlook, as the future activity index, a measure of business confidence in the PMI survey, has seen a strong increase in August. This newfound optimism might mean that businesses are less likely to make hasty workforce reductions during this temporary economic lull.
