Australiaā€™s flash PMI shows a return to contraction, with services-led weakness and surging cost pressures highlighting a stagflationary backdrop.

Summary:

  • Flash Australia composite PMI falls to 47.0 (Feb: 52.4) ā†’ first contraction in 18 months
  • Services activity drops sharply to 46.6 (Feb: 52.8) ā†’ first decline in over two years
  • Manufacturing PMI eases to 50.1 (Feb: 51.0), while output remains subdued at 49.8 (Feb: 49.6)
  • Demand weakens, with new orders falling for first time since July 2024
  • Input cost inflation jumps to highest in over three years
  • Selling prices rise at fastest pace since August 2023
  • Business confidence drops to a 20-month low amid Middle East uncertainty

Australiaā€™s private sector slipped back into contraction in March, according to preliminary S&P Global flash PMI data, marking the first decline in activity in 18 months and signalling a sharp loss of momentum heading into the second quarter.

The headline composite PMI fell to 47.0 in March from 52.4 in February, dropping below the 50 threshold that separates expansion from contraction and posting the steepest decline in output since late 2023. The downturn was broad-based but driven primarily by a sharp deterioration in the services sector, where business activity fell to 46.6 from 52.8, marking its first contraction in more than two years.

Manufacturing activity proved more resilient, although still softening. The headline manufacturing PMI eased to 50.1 from 51.0, while the output index remained in contractionary territory at 49.8, albeit slightly improved from 49.6 previously.

The pullback in activity was linked to weakening demand conditions, with new orders declining for the first time since July 2024. Firms cited global uncertainty and economic disruption stemming from the Middle East conflict as key factors weighing on demand. While export orders showed some resilienceā€”rising at the fastest pace in over three-and-a-half yearsā€”this was insufficient to offset broader domestic weakness.

At the same time, cost pressures intensified significantly. Input price inflation surged to its highest level in more than three years, driven by elevated fuel and raw material costs, with supply chain disruptions also cited. Firms responded by passing through part of these increases, lifting output prices at the fastest pace since August 2023.

Forward-looking indicators deteriorated, with business confidence falling to a 20-month low as firms expressed concern over fragile demand and persistent cost pressures. Employment continued to expand modestly, suggesting some resilience in the labour market, although hiring slowed.

Overall, the data point to a stagflationary mix of weakening growth and rising cost pressures, complicating the policy outlook for the Reserve Bank of Australia.