The Australian economy is experiencing a rapid slowdown, according to the latest data from Judo Bank’s purchasing managers index (PMI) for August.
In August, the Judo Bank Flash Australia composite PMI output index dropped to 47.1 from 48.2 in July, falling below the no-change mark of 50.0. This decline indicates a substantial reduction in private sector activity.
This rate of decline in business activity is the fastest since January 2022, as reported by the bank.
These findings are in line with recent signals from the Reserve Bank of Australia, suggesting that interest-rate increases may be on hold due to a broad slowdown in the resource-rich economy. The slowdown is further exacerbated by evidence of a worsening economic performance in China.
Warren Hogan, chief economic adviser at Judo Bank, commented on the flash PMI readings, stating that they provide further evidence of a cyclical slowdown in the Australian economy. Both the output and new orders indexes have experienced a continuous drop for two months in a row, confirming the ongoing economic growth deceleration throughout the winter months.
According to Hogan, the services industries, which were previously resilient, have faced a significant loss of momentum in activity over the past three months. However, Australia’s manufacturing sector has stabilized, with activity readings just below the neutral 50 level.
Despite the economic challenges, firms are still hiring, as indicated by the employment index in August, which remains comfortably above neutral levels.
Economic Insights: Inflation Pressures and Labor Demand in Australia
There are indications that inflation pressures in Australia are proving to be persistent, potentially leading to further interest-rate increases. This is supported by the expansion of both services and manufacturing employment in August, highlighting the ongoing demand for labor and employment shortfalls experienced by many businesses in the country.
The demand for labor may be remaining high due to chronic labor shortages and skills mismatches, even amidst the cyclical economic slowdown. This suggests that businesses are actively seeking to meet their labor requirements, despite the broader economic trends.
Despite the economic challenges, businesses in Australia remain confident about the future. The future activity index, which serves as a proxy for business confidence in the Purchasing Managers’ Index (PMI) survey, showed a significant increase in August. This renewed optimism makes it less likely that business leaders will resort to reducing their workforces during any short-lived economic downturn.
Examining the inflation indicators within the Judo Bank data, it becomes clear that the disinflation trend observed throughout 2022 has come to an end in 2023. The prices of inputs and final goods have both stopped falling over the past six months. However, final prices remain elevated at levels consistent with a future inflation rate of at least 4%, which exceeds the desired range of 2% to 3% set by the Reserve Bank of Australia.
It is too early to determine with confidence whether wage pressures will surpass the Reserve Bank of Australia’s current expectation of 4% annual growth in 2023. However, given the situation, it is evident that the Australian economy continues to be influenced by various factors that require careful monitoring and analysis.