Renewed restrictions hit business activity

The latest Commonwealth Bank ‘Flash’ Purchasing Managers’ Index (PMI) indicates Australia’s private sector economy reversed recent gains in August following the re-introduction of lockdowns and border restrictions in some parts of the country.

Australian business activity fell in August, primarily due to declining activity in the services sector, which experienced solid falls in demand amid renewed coronavirus restrictions in parts of Australia. While services sector activity declined for the first time in three months, activity in Australia’s manufacturing sector improved modestly in August. External demand for manufacturers continued to weaken, with new export orders declining for the seventh consecutive month and at a steep rate.

CBA’s Head of Australian Economics, Gareth Aird, said: “The decline in business activity over August is hardly surprising given the lockdown measures in Victoria. With the August composite flash PMI showing only modest contraction it is highly likely that outside of Victoria private output in the rest of Australia continued to expand over the month”.

The headline Commonwealth Bank Flash PMI Index in August was 48.8, down from 57.8 in July. Readings below 50.0 signal a deterioration in business activity on the previous month, while readings above 50.0 show improvement. Readings for the services sector fell from 58.2 in July to 48.1, while the manufacturing sector remained largely unchanged at 53.9, down from 54.0 in July.

Workforce numbers continued to fall across the services and manufacturing sectors as Australian businesses continued to cut back on staff. Mr Aird said: “The fall in employment is the inevitable consequence of shutting down large parts of the Victorian economy.”

Sentiment regarding the year ahead remained positive with optimism remaining across both sectors, although not as strong as seen in July. Firms continued to expect further recovery from the coronavirus downturn over the next 12 months.

“Encouragingly, firms collectively retain an optimistic view on the outlook despite the setback in Victoria. Ongoing fiscal support for households and businesses remains critical to ensuring that optimism is not misplaced,” Mr Aird said.

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 August will be published in approximately one week.