Recent economic data in Australia hasn't been all that flash, but we finally have something positive to report

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  • Recent economic data in Australia hasn’t been all that flash.
  • However, there’s finally been some good news: activity levels at businesses improved at the fastest pace this year in May.
  • New orders rose, pointing to improved activity levels ahead. After shedding staff in April, hiring levels increased.
  • With the election over, income tax cuts on the way and a possible RBA rate cut also in the offing, the Commonwealth Bank suggests the recent improvement may continue in the months ahead.

There hasn’t been a lot of good news around about the Australian economy of late. However, we finally have something positive to report.

For the first time in four months, activity levels at businesses have improved.

The Commonwealth Bank’s Flash Australia Composite Purchasing Managers Index (PMI), produced in conjunction with IHS Markit, rose to 52.2 points in May after seasonal adjustments, an improvement from the 50.0 level reported in April.

The Composite PMI 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.

The flash estimate is derived from around 85% of survey responses, and is a fairly accurate guide as to what the final PMI figure for May will be when released in early June.

IHS Markit

According to IHS Markit, Australian companies “increased business activity … amid signs of a pickup in demand following a recent soft patch”.

New orders, a lead indicator on activity levels in the months ahead, rose at the fastest pace this year. After cutting staffing levels in April, hiring resumed in May.

In what will be welcome news for the RBA at a time when inflationary pressures are weak, firms indicated that both input and selling prices both increased from a month earlier.

Reflecting those views, confidence levels also increased.

“Business confidence strengthened for the second month running amid higher new orders and expectations that demand conditions will improve following the federal election,” IHS Markit said.

As seen in the chart below, the improvement in the composite PMI reflected a noticeable improvement in activity levels at services firms, the largest sector in the country and also the largest employer.

Activity levels at manufacturers, a far smaller part of the Australian economy, also rebounded, improving at the fastest pace in three months.

IHS Markit

With the election out of the way and the RBA poised to cut official interest rates for the first time in nearly three months in June, according to market pricing, Belinda Allen, senior economist at the Commonwealth Bank, believes the improvement in May could be a sign of things to come.

“A strong rebound in the services PMI is encouraging, as is a small improvement in the manufacturing PMI,” Allen said.

“There is scope for the PMIs to push even higher over coming months from the expected RBA rate cuts, in combination with the personal income tax relief announced in the 2019/20 Budget.

“This should boost disposable income and translate into a lift in consumer demand.”

Given warnings from the National Australia Bank that Australian retail sales may have fallen off a cliff in April, here’s hoping Allen is right.

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