The slowdown in the Australian economy looks like it's getting more pronounced, and economists are calling it 'a significant event'

Tauseef Mustafa/AFP/Getty Images
  • The slowdown in the Australian economy looks like it has continued in early 2019, according to the latest Commonwealth Bank-IHS Markit Flash Australia Composite PMI.
  • Activity levels in the services sector weakened in February while those for manufacturing firms improved at a slower pace.
  • New orders — a lead indicator on activity levels — were weak. However, hiring remained firm.

The slowdown in the Australian economy late last year looks like it has continued in early 2019.

The Commonwealth Bank’s Flash Australia Composite Purchasing Managers Index (PMI), produced in conjunction with IHS Markit, fell to 49.7 after seasonal adjustments, marking the first sub-50 reading in the near three-year history of the survey.

The PMI survey measures changes in activity levels across Australia’s services and manufacturing sectors from one month to the next. Anything above 50 signals activity levels are improving, while a reading below suggests they’re deteriorating.

The distance away from 50 indicates how quickly activity levels are expanding or contracting. So at 51.5, activity levels still improved last month, albeit at the slowest pace in at least three years.

CBA, IHS Markit

The flash estimate is derived from around 85% of survey responses, and is a fairly accurate guide as to what the final PMI will show when released one week later.

Combined, the services and manufacturing sectors account for around three-quarters of the Australian economy.

So, at 49.7 in the flash estimate, activity levels weakened for the first time in nearly three years in February, hinting that the deceleration in the economy in the second half of last year is getting more pronounced.

“The dip in the PMI below the 50 line that separates expansion from contraction is a significant event,” said Michael Blythe, Chief Economist at the Commonwealth Bank.

“It is the first negative reading in the life of the Australian PMI survey… [and] indicates a loss of momentum in the Australian economy at the start of 2019.”

Blythe says the result “underlines the shift in forward guidance by the RBA to a more neutral setting” this month, abandoning the view previously held that the next move in official interest rates was likely to be higher.

Breaking down the Composite Index, it was clear the weakness was concentrated in just one sector. Unfortunately, it just happened to be the largest: the services sector.

CBA, IHS Markit

“The service sector dipped into contraction territory in February, the first time this has been the case in the 34-month survey to-date,” IHS Markit said.

“New business also decreased slightly. Meanwhile, rates of inflation in both input costs and output prices quickened from those seen in January.”

While the industry-wide performance was sluggish, the group noted that “employment increased at a solid pace, and one that was the sharpest in three months”.

So hiring remained firm despite the deterioration in conditions. One suspects that won’t continue for long unless activity levels begin to pickup ahead.

While the services sector weakened, manufacturing — a far smaller part of the economy at under 10% — continued to hum along nicely with its flash PMI coming in at 53.1, down marginally from January’s 53.9 reading.

“In contrast to the picture for services, manufacturing business conditions continued to improve during February. That said, there were signs of growth softening over the month,” IHS Markit said.

“Both output and new orders increased to the least extent in seven months, while new export business rose only marginally. The rate of job creation also eased.”

Despite the mixed report card, and even with a further deterioration in the services sector, Blythe says the leading indicators still suggest that the recent deceleration is unlikely to last for long.

“The divergence between service sector activity and manufacturing activity should be noted,” he said.

“It shows the slowdown is not broadly based and the more forward looking components like jobs and business sentiment point to a recovery later in 2019.”

Given the alternative scenario, here’s hoping Blythe and the leading indicators are right.

NOW READ: Australia’s economic slowdown could be about to get even worse

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