Costs Driving Higher Services Prices, Activity Slows

According to the Judo Bank composite PMI, the Australian economy barely grew in June. The index was revised down to 50.1 from the preliminary reading of 50.5. Services were revised down to 50.3 from 50.7 (May 52.1) and manufacturing to 48.2 from 48.6. Q2 average services PMI was higher, suggesting Q2 GDP may be stronger than Q1.

• New orders and activity supported the services sector but also slowed. Employment continued to grow. High costs were passed onto customers at the fastest pace in four months, which is concerning and likely to mean that Q2 services inflation remained elevated. If this occurs, then another rate hike at the August 1 RBA meeting is likely, and it was higher rates that weighed on services confidence in June. It is at a 4-month low but businesses are optimistic that sales will improve over the next year.
• Higher services costs were due to wages, transport and fuel. While they rose, it was at their slowest pace in 20 months.
• Judo Bank chief economic adviser Hogan said “Most forecasters had been expecting to see a stronger reaction in the economy to 400bp of rate hikes over the past fourteen months. The resilience of the economy, strong labour demand and high inflation as we enter the winter months of 2023 highlight the risk that interest rates may need to rise above 5% if we are to re-establish low and stable inflation within the Australian economy by 2025.
• See full report here.

Source: MNI - Market News/Bloomberg/ABS