• Activity levels at Australian businesses improved in April, according to the Commonwealth Bank’s Flash Australia Composite Purchasing Managers Index (PMI).
• Activity at services firms rebounded after declining for several months. However, the pace of improvement at manufacturing firms slowed.
• Employment fell for the first time in the three-year history of the survey. Inflationary pressures and new orders were also weak. Confidence levels remain at multi-year lows.
• The RBA expects solid labour market conditions will help to lower unemployment and boost inflationary pressures in the period ahead. The PMI report casts doubt as to whether such a scenario is likely.

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Activity levels at Australian businesses improved in April, adding to tentative evidence that the slowdown in the economy may be easing.

However, employment fell, new orders remained weak, and inflationary pressures eased, which lends to uncertainty of whether this improvement will be sustained.

The Commonwealth Bank’s Flash Australia Composite Purchasing Managers Index (PMI), produced in conjunction with IHS Markit, rose to 50.6 after seasonal adjustments, an improvement from the 49.5 level reported in March.

The Composite PMI measures changes in activity levels across Australia’s services and manufacturing sectors from one month to the next. Anything above 50 signals activity levels are improving, while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

The flash estimate is derived from around 85% of survey responses, and is a fairly accurate guide as to what the final PMI figure will be when released in early May.

The improvement in the latest survey was concentrated in the services sector — the largest employer in the country — with its flash PMI lifting to 50.5 from 49.3 in March. In contrast, the flash manufacturing PMI eased to 51.0 from 52.0, indicating a slower improvement in overall activity levels.

Australia’s services and manufacturing sectors account for around three-quarters of the economy.

Despite the lift in the headline Composite PMI, the details of the April survey were less encouraging, particularly when it came to employment which fell for the first time in the three-year history of the survey.

IHS Markit put the decline down to continued weakness in new orders, regarded as a lead indicator on activity levels in the future.

“Latest data continued to signal a lack of demand as new orders were broadly unchanged for the second month running,” it said.

“Meanwhile, shortages of new work led to a first reduction in staffing levels in three years.”

With activity levels remaining sluggish, inflationary pressures also eased with input costs for businesses increasing at the slowest rate on record. Output costs — those paid by customers — also grew at its slowest pace in 10 months.

Overall confidence levels also held at the lowest level in the history of the survey, adding to concern about the outlook for capital investment.

Gareth Aird, Senior Economist at the Commonwealth Bank, said that while the modest rebound in service sector activity was encouraging, the fall in employment subindex is concerning.

“The main concern for us… was the employment sub-components of both the manufacturing and services PMIs. Both readings moved lower and sit in contractionary territory,” he said.

“The next few monthly updates will confirm if the dip is transitory or not.”

This may mark the start of a longer-lasting trend that could disappoint policymakers at the Reserve Bank of Australia (RBA) who are placing significant faith in solid hiring to help to lower unemployment and lift wage and inflationary pressures in the years ahead.

The signals from the latest PMI report cast renewed doubt over whether such a scenario is likely.

Australia will receive updated data on unemployment and consumer price inflation in the coming week, starting with the release later today of labour market figures for March.

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