The latest Commonwealth Bank ‘Flash’ Purchasing Manager Index (PMI) for April confirms a much stronger decline in business activity for Australia’s private businesses than in March, with service providers affected much more than manufacturers.
Commonwealth Bank Head of Australian Economics Gareth Aird says the sharp deterioration in Australian PMI readings highlights the increasing impact of the coronavirus pandemic on the Australian economy.
“The collapse in the headline Flash PMI index for April reflects the severe contraction in economic activity currently taking place due to the coronavirus,” Mr Aird said.
Company shutdowns, government restrictions and steep falls in customer demand, both domestically and from overseas, have all contributed to the overall reduction in business activity. With any reading below 50 signalling a deterioration in business activity on the previous month, the headline Flash PMI index for April was 22.4, down from 39.4 in March.
While both the services and manufacturing sectors saw output fall sharply in April, the rate of reduction in the services sector was particularly strong.
“The services sector has been hit a lot harder than the manufacturing sector. And the pace of job shedding is concerning though not surprising given the large number of Australian businesses that remain shut. The extent to which the PMIs rebound will be dictated in large part by the duration of the enforced shutdown and also by the success of efforts to eliminate the spread of the virus,” Mr Aird said.
In April, the Flash PMI services index fell to 19.6 (down from 38.5 in March), while the Flash PMI manufacturing index lessened at a lower rate to 45.6 (down from 49.7 in March).
In April, service providers lowered their prices after input costs fell amid lower wages and a drop in fuel prices. Conversely, manufacturers increased their charges modestly after a signalled sharp and accelerated increase in their input costs.
While confidence was the second-lowest in the series’ history, companies are hoping that business will return to normal over the coming year, despite the severity of the current downturn.
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.