Australia’s economy shrinks again, Japan’s service sector fuels growth

Oleksii Liskonih

Flash PMI data for October indicated that the Australian economy had returned to contraction after eight consecutive months of growth. On the other hand, Japan’s expansion accelerated at the start of the fourth quarter, fueled by improvements in the services sector as the economy has reopened.

Although the two APAC economies diverge in performance, some common themes, including higher inflationary pressures and declining business confidence, have persisted, highlighting two worrisome trends to watch with PMIs in the coming months.

Australia’s private sector slides into contraction as uncertainty grows

The latest flash PMI data showed Australia’s private sector economy contracted for the first time since the start of the year in October. The S&P Global Flash Australia Composite PMI slipped to 49.6 from 50.9 in September (final reading).

The deterioration in business activity was mainly attributed to the weaker performance of the services sector, where demand has contracted at the fastest rate since September 2021. Respondents to the survey indicated that recent increases interest rates and heightened economic uncertainties have led to a more cautious attitude towards demand for services in Australia. Growth in Australia’s manufacturing sector meanwhile continued in October but also slowed, according to the latest readings.

S&P Global Flash Composite PMI

S&P Global, at Jibun Bank

Japan’s service sector gets a boost as it reopens

Meanwhile, the Flash Japan composite PMI at Jibun Bank (compiled by S&P Global) showed the Japanese economy expanding for a second straight month in October and at its fastest pace in five months. Faster growth in service activities fueled the expansion of the private sector, with the easing of international border restrictions and the launch of the national travel discount program supporting the service sector in October. Overseas demand for Australian services has notably grown at a healthy pace and may continue to show improvements in the coming months, having only fully reopened to tourists from October 11.

At the same time, the Japanese manufacturing sector remained under pressure due to rising prices and weak demand. Production in the manufacturing sector fell for the fourth consecutive month in October.

Manufacturing and service production

S&P Global, at Jibun Bank

Price pressures persist for APAC economies according to Flash PMIs

While Australia and Japan have seen diverging trends in private sector output performance, common themes exist, such as lingering price pressures, which continue to pose risks to any economic recovery. .

Input costs and product prices continued to rise at the start of the fourth quarter. While input cost inflation in Australia and Japan showed signs of easing compared to the previous month, it did not translate into lower selling prices. Instead, output prices rose at faster rates in Australia and Japan in October, posing risks for both economies. This is a particularly worrying trend given the potential to further corrode demand directly through higher costs, and also indirectly in the case of Australia via the reaction of the Reserve Bank of Australia (RBA) by increasing interest rates.

Input and output price indices

S&P Global, at Jibun Bank

Supply delays continue to taper into early Q4 2022

Delivery times from manufacturing suppliers

S&P Global, at Jibun Bank

While pricing pressures appear to be lingering, there was at least some good news as supply bottlenecks continued to ease according to the latest supplier lead time indices from flash PMIs. of October. Delivery times from suppliers have lengthened at the slowest rate since August 2019 and February 2021 for Australia and Japan respectively.

Although the shortening of lead times appears to be good news at first glance, boding well for the inflation trend, the assessment of other PMI sub-indices such as the New Orders Index suggests that Relatively weaker demand continued to play a key role and doesn’t quite mean good news here. Demand growth in Australia’s manufacturing sector remained well below the 12-month average in October, while new incoming orders for Japanese manufactured goods contracted for a fourth consecutive month. Therefore, while the easing of supply constraints should further support production, the lack of demand poses a bigger challenge. With greater economic uncertainty looming and most central banks around the world continuing to raise rates amid a slowing growth environment, there seems little to support a trend reversal for the moment.

Misery loves company

Amid the range of challenges facing private sector companies, business confidence has deteriorated in the latest October flash results. The future production index fell in Japan and Australia to the lowest since April 2022 and April 2020 respectively, the latter being the peak of the COVID-19 pandemic. Anecdotal evidence suggested companies were concerned about growing economic uncertainties and downside risks to sales. Australian businesses were further mired by the prospect of higher interest rates weighing on demand.

The future production index is the only sentiment indicator among the PMI sub-indices. Given the usefulness of the indicator in measuring business confidence and providing an indication of future developments, the latest figures suggest that the current economic slowdown could continue in the coming months.

Future production indices

S&P Global, at Jibun Bank

Original post

Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.

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