Manufacturing and services sectors in Australia are expanding modestly as inflationary pressures ease, new CBA data shows.

The latest “flash” CBA Composite Purchasing Managers Index (PMI) released today shows the two sectors improved in 2018, however the expansion was lower than the same time in 2017 and as a result are heading into 2019 with slow momentum.

CBA Chief Economist Michael Blythe said: “The rate of expansion for business activity, as a whole, over the past month has weakened and is below the average for 2018."

In December, the headline index fell to 52.4 from 53.9 in November, but remained in expansion territory.

While business sentiment hit a two-and-a-half-year low in December, Mr Blythe maintains a positive outlook for the health of both sectors in 2019.

“PMI readings for Q4 were above those for Q3, so the slowdown does not look like an ongoing slide. It also suggests that the weakness in Australian GDP growth in Q3 won’t be repeated in Q4,” Mr Blythe said.

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.