The latest Commonwealth Bank ‘Flash’ Purchasing Manager Index (PMI) signals a steep decline in business activity in March, with the services sector posting a much faster reduction in activity than observed in the manufacturing sector.
Commonwealth Bank Chief Economist Michael Blythe said: “The sharp deterioration in PMI readings during March underline the increasing impact of the coronavirus on the Australian economy. The services sector is being hit hard by the cancellation of events, general fears about social interaction and a very sharp decline in offshore demand as travel restrictions bite.”
In March, coronavirus contributed to the fastest fall in manufacturing production in the survey’s near four-year history, however some manufacturers expanded output due to a lack of goods coming from China.
“The manufacturing sector is faring a little better but the leading indicators are flashing warning signs. The deterioration in supplier delivery times is accelerating, highlighting the disruption to supply chains. And the lower Aussie dollar is pushing input prices for manufacturers up at a rapid rate”.
In March the Flash Composite Output Index was down to 40.7 from 49.0 in February, wIth readings below 50.0 signalling a deterioration in business activity on the previous month. With the Flash Services Output Index falling to 39.8, from 49.0 in February, and the Flash Manufacturing Output Index falling to 50.1, from 50.2 in February.
Mr Blythe said: “The one slightly more positive indication from the flash PMI readings is the relatively muted pull back in the employment indexes.
“This response offers some hope that, with the right mix of economic policies, the damage to the labour market from the coronavirus can be contained.”
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 March 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 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.