Services Sector Passed Higher Costs On In July

The Judo Bank preliminary July PMIs suggest that the economy barely grew at the start of Q3 with services growth mildly positive but manufacturing continuing to contract. The composite and services PMIs were at 6-month lows of 50.2 and 50.8 respectively. The RBA has been concerned about services inflation and the PMI is likely to add to this as higher costs were passed on.

• The Q2 average PMI was slightly stronger on the quarter at 52.4 suggesting that growth should improve but the July reading is tentatively signalling that it will be short lived. But Judo Bank notes that July was too early to capture the positive effects from tax cuts and other fiscal stimulus.

Source: MNI - Market News/Refinitiv/Bloomberg

• The drop in the composite PMI was driven by new orders, which contracted for the second straight month. Exports orders were particularly weak, falling at their fastest pace in close to 4 years. Despite this employment growth remained positive, driven by services, but slowed.
• The services sector reported softer demand but cost inflation at its highest since November last year driven by the increase in the minimum wage (+4 points to 63.3). Businesses were still able to pass higher costs onto customers with Judo Bank recording a pickup in selling price inflation. It said that it is consistent with 4% CPI inflation.
• The manufacturing PMI improved only marginally to 47.4, with output shrinking faster at 46.3, down 0.5 points, driven by lower orders especially from overseas. Unlike services, weaker production meant job cuts and input inflation was below the series average and selling prices were moderate to attract demand.
• Confidence in the outlook deteriorated with services sentiment at its lowest since data began in May 2016, excluding the pandemic.