Business recovery gathers pace

The latest Commonwealth Bank ‘Flash’ Purchasing Manager Index (PMI) signals an improvement in business activity growth in July, as the economic recovery from the coronavirus downturn continues.

Australian business activity in July grew at the fastest pace since April 2017, with the overall expansion driven by a sharp rise in activity in the services sector following the easing of restrictions in most states.

Activity in the services sector has now risen for two successive months, with the growth of new orders having accelerated in the services sector. While business conditions in the manufacturing sector improved at the greatest pace in a year-and-a-half.

CBA’s Head of Australian Economics, Gareth Aird said: “The improvement in growth momentum in July is welcome, but concerns around coronavirus and the potential policy responses to a lift in the number of new cases continue to weigh on activity.”

The headline Commonwealth Bank Flash PMI Index in July was 57.9, up from 52.7 in June, with the Flash Services Business Activity Index at 58.5, up from 53.1 in June, and Flash Manufacturing PMI at 53.4, up from 51.2 in June. Readings above 50.0 signal an improvement in business activity on the previous month, while readings below 50.0 show deterioration.

Despite the growth in business activity in the services and manufacturing sectors, workforce numbers were down across both sectors for the sixth month running. Although, the latest fall was the weakest since February.

Mr Aird said: “The fall in employment looks a little surprising given some other measures of labour demand have firmed more recently. But encouragingly the acceleration of growth in new orders suggests labour demand should improve.

“The lack of any inflationary pulse was once again evident. That supports our view that we will be in a low inflation environment for an extended period of time.”

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 May 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.

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.