Flash PMI: Australian private sector returns to contraction as price pressures build

The latest survey pairs softer activity with faster inflation, an uncomfortable combination for the path of interest rates. With output declining, the case for another rate increase weakens, but quicker growth in both input and output prices argues against any imminent cut. That tension may make the Australian dollar and short-dated bonds more volatile as investors try to balance the two forces. Energy remains an important transmission channel: companies pointed to more expensive energy, shipping and commodities, so oil prices holding above $110 a barrel are likely to keep feeding through into Australian business costs and consumer inflation. At the same time, weaker business sentiment raises the chance of more cautious investment and hiring toward the end of the year, something equity investors with exposure to domestic sectors are likely to monitor.

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Earlier: more rate pain may be coming

• RBA’s Hauser puts November hike in play

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October put Australia’s private sector back into contraction as higher prices and borrowing costs curbed demand, even while cost pressures grew stronger. The economy now faces softer growth and firmer inflation at the same time.

Key points:

• The S&P Global flash Australia composite PMI output index dropped to 47.7 in October, down from 51.3, marking the first sub-50 reading in five months and the weakest level since March.
• Services activity fell to 47.8 from 51.9, the sector’s first contraction since May. The manufacturing PMI ticked higher from 49.6 to 49.7, while the output subindex moved up to 46.5 from 46.2, remaining below 50.
• Expansion in new orders slowed to roughly flat, as goods orders declined more steeply and services bookings grew less quickly. Export orders held steady overall.
• Cost pressures were the steepest since May, pushed by energy, freight, commodities and wages, and the pace at which selling prices rose also accelerated for a second straight month.
• Headcount increased thanks to services recruitment, while unfinished work accumulated at the fastest pace in a year and a half.
• Business sentiment remained in positive territory, though it slipped to its weakest level since June.

According to flash survey data from S&P Global, Australia’s private sector moved into contraction in October for the first time in five months, with higher prices and costlier borrowing weighing on demand. At the same time, price pressures intensified.

The S&P Global flash Australia composite PMI output index stood at 47.7 in October, down from 51.3 in September and beneath the 50 threshold that distinguishes growth from contraction. It was the weakest result since March. The decline was driven mainly by services, with the sector’s business activity index falling from 51.9 to 47.8 for its first contraction since May. Manufacturing output kept shrinking, though at a slightly slower rate, with the index ticking up to 46.5 from 46.2. The headline manufacturing PMI was virtually unchanged at 49.7, compared with 49.6.

Weaker demand lay behind the downturn. New business growth decelerated to roughly neutral, with goods orders sliding more sharply and services order growth easing. Businesses across both sectors blamed weak confidence, higher interest rates and widespread inflation for soft demand in the early weeks of the fourth quarter. Foreign demand was broadly flat, a better outcome than the slight drop recorded in September, as factories saw a more moderate decline in new export business.

Even with output down, companies took on workers during October, and the hiring was entirely in services. Having shed jobs late in the third quarter, service providers added staff again to manage heavier workloads. The amount of outstanding work in the private sector increased at the quickest pace in a year and a half.

The inflation side of the release offered less encouragement. Input costs advanced at their quickest pace since May, with factories seeing bigger increases than service providers. Among goods makers, the jump was largely tied to supply constraints, since vendor delivery times stretched further. Both sectors reported higher costs for energy, shipping, commodities and labour. Companies increasingly shifted those costs to customers, lifting output price inflation for a second month in a row.

According to Jingyi Pan, economics associate director at S&P Global Market Intelligence, operating conditions worsened as the fourth quarter opened, with services now shrinking along with manufacturing. Drawing on comments from firms, she said the slowdown reflected demand being eroded by higher prices and interest rates, as well as less confident businesses facing an uncertain economy. She cautioned that the quicker increases in both cost and selling prices could keep inflation high in the months ahead, creating another threat to demand.

Business confidence was still positive on the whole, with companies expecting expansion projects to boost output over the next 12 months. But sentiment dropped to its weakest since June, with some firms mentioning worries about the economy and more difficult trading conditions.

The final October numbers are scheduled for release on November 2 for manufacturing and November 4 for services and the composite index. In the past, flash estimates have rarely diverged much from the final results.

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