Australia's September PMI: Growth at Q3 low, manufacturing in contraction, jobs fall

The survey gives the RBA a conflicting signal just days before its 29 September decision: weaker demand and job reductions suggest caution, but faster output price growth keeps the inflation argument for a rate hike alive. With markets already pricing in a move heavily, the data might have more influence on expectations for November than for next week. Energy remains the main transmission channel, with Middle East-driven fuel costs cited as the primary source of input price pressure, so oil prices stay key to Australia's inflation outlook. For the Australian dollar, weaker growth momentum is a slight headwind, though rate differentials likely will dominate.

Earlier:

• All four major Australian banks now expect RBA hike to 4.60% on September 29
• RBA Governor Bullock flags inflation risks as higher neutral rates gain focus

Australia's private sector continued to expand in September, but barely, as factories contracted and companies cut jobs while still increasing prices at a faster pace.

Summary:

• The flash composite output index dropped to 50.8 in September from 52.7, marking a fourth consecutive month of expansion but the weakest reading in the third quarter.
• Services activity eased to 51.4 from 53.2, while the manufacturing PMI declined to 49.3 from 52.0, its first contraction since March, with factory output falling at the fastest rate in 21 months.
• New business increased at its slowest pace in three months, pulled down by a renewed decrease in manufacturing orders, and export orders fell for the fifth time in six months.
• Private sector employment declined for the first time in four months, and although the drop was modest, it was the sharpest since October 2020.
• Input cost inflation reached a three-month high, primarily due to Middle East-related energy and fuel costs, and output prices rose strongly at a faster rate than in August.
• Business confidence fell to a three-month low and further below its long-run average.

Preliminary survey data from S&P Global, released on Wednesday, showed Australia's private sector growth eased to its softest pace of the third quarter in September, as manufacturing returned to contraction and companies reduced headcount for the first time since May.

The S&P Global Flash Australia Composite PMI Output Index declined to 50.8 in September from 52.7 in August. That was the fourth straight month above the 50 threshold that separates expansion from contraction, though it indicated only marginal growth.

Services continued to be the primary driver of growth, but activity grew at a slower pace for the second consecutive month, with the services index sliding to 51.4 from 53.2. Manufacturing was the laggard. The headline manufacturing PMI slipped to 49.3 from 52.0, its first reading below 50 since March, and factory output dropped at the fastest pace in 21 months as order books shrank again.

Weaker demand was central to the deceleration. Total new business increased for a third month, but at the slowest rate in that sequence, held back by the fresh drop in manufacturing orders. New export orders fell for the fifth time in six months, once again tied to softness in goods production.

The labour market showed a notable development. Private sector employment dropped for the first time in four months, and though the decline was modest, it was the largest since October 2020, with job cuts occurring across various industries. Unfinished work still increased a little.

Price pressures moved counter to activity. Input cost inflation climbed to its highest in three months, with survey respondents often mentioning the Middle East conflict and its impact on energy and fuel costs as the main factor. Output prices increased at a strong pace, faster than in August. S&P Global noted, however, that inflation rates were still well below those seen in the second quarter. The rise in cost pressures was concentrated in services, while manufacturers experienced some easing in input inflation but faced longer supplier delivery times.

Business confidence fell to a three-month low and moved further below its long-run average, with companies citing worries about costs, demand, and keeping customers. An economist at S&P Global Market Intelligence stated that the economy ended the quarter on a weaker note, though it still managed to maintain growth over the period, which was an improvement over the second quarter's lackluster performance.

The figures come just ahead of the Reserve Bank of Australia's 29 September policy meeting, where a rate hike is widely anticipated. Slowing demand and declining employment suggest a softening economy, but higher selling prices will continue to highlight inflation risks. Final manufacturing data for September are scheduled for release on 1 October, with services and composite numbers due on 5 October.