Australia’s private sector contracts again as business confidence sinks to COVID-era lows
Synopsis
Australia’s private sector slipped back into contraction in May, with business confidence falling to pandemic-era lows as firms grappled with weak demand, rising costs and Middle East supply chain disruptions.
Australia’s private sector activity fell back into contraction in May, with fresh survey data showing weakening demand, collapsing business confidence and rising supply chain stress linked to the ongoing Middle East conflict. According to S&P Global’s flash PMI survey, the headline composite output index dropped to 47.8 in May from 50.4 in April, marking the second contraction in three months and signalling deteriorating conditions across both the services and manufacturing sectors.
Key highlights
- Australia’s flash composite PMI fell to 47.8 in May from 50.4 in April
- New orders dropped at the fastest pace since September 2021
- Business confidence matched record lows seen during the COVID-19 outbreak
- Private sector employment contracted for the first time since late 2024
- Manufacturing supply chains were hit by vessel delays and fuel cost pressures linked to the Middle East conflict
Services and manufacturing activity weaken
The services sector led the decline, with the business activity index falling to 47.7 from 50.7 in April, slipping below the key 50-point expansion threshold.
Manufacturing conditions also remained weak. The manufacturing PMI eased to 50.2 from 51.3, while the manufacturing output index stayed at 48.5 for a fourth consecutive month, signalling ongoing contraction in factory production.
S&P Global said the modest headline manufacturing reading was largely supported by worsening supplier delivery times rather than genuine demand strength.
Survey respondents pointed to shipping delays, raw material shortages and higher freight costs caused by disruption through Middle East trade routes.
New orders collapse at fastest pace since 2021
The sharp deterioration in new business emerged as one of the most alarming signals in the report.
Both manufacturers and service providers reported shrinking order books, with firms linking weaker customer demand to uncertainty surrounding the Middle East conflict and concerns about higher borrowing costs.
Manufacturing supply chains were particularly strained, with supplier delivery times deteriorating at the second-fastest pace in almost four years.
The survey noted that vessel delays, material shortages and rising transportation expenses were increasingly feeding into operating costs for Australian businesses.
Business confidence falls to record lows
Business sentiment deteriorated sharply in May, falling to its joint-lowest level since the survey began more than a decade ago.
The reading matched the level recorded during the onset of the COVID-19 pandemic in March 2020, underscoring growing anxiety among businesses over slowing economic activity, persistent inflation pressures and geopolitical instability.
Companies also raised concerns about the risk of future interest rate increases as input costs remain elevated.
Labour market weakens as firms cut jobs
The survey showed private sector employment declined for the first time since late 2024, with the pace of job shedding marking the joint-fastest fall in more than five-and-a-half years.
Businesses moved to reduce staffing levels as weakening demand and cost pressures squeezed margins.
At the same time, inflationary pressures remained elevated. Input price inflation stayed at its second-highest level since August 2022, driven by higher fuel prices, transportation costs and raw material expenses.
RBA faces growing policy dilemma
The latest PMI figures are likely to intensify scrutiny on the Reserve Bank of Australia’s next policy move.
While slowing growth and weakening employment conditions strengthen the case for caution on further tightening, stubborn cost pressures continue to complicate the inflation outlook.
S&P Global Market Intelligence economist Eleanor Dennison said the data showed Australia’s economy was facing a deeper demand slowdown even as inflationary pressures remained entrenched.
The combination of weakening activity, falling confidence and persistent input costs leaves policymakers navigating an increasingly difficult balancing act.
FAQs
Q1: What is Australia’s flash PMI?
The flash Purchasing Managers’ Index (PMI) is a monthly survey that measures business activity across Australia’s manufacturing and services sectors. A reading above 50 indicates expansion, while below 50 signals contraction.
Q2: Why did Australia’s PMI fall in May?
The decline was driven by weaker new orders, rising costs, supply chain disruptions and uncertainty linked to the Middle East conflict.
Q3: What does the PMI data mean for the Australian economy?
The data suggests economic activity is slowing, with businesses facing weaker demand and growing cost pressures, raising concerns about growth and employment conditions.
Q4: How could the PMI report affect the RBA?
The weak PMI reading may strengthen arguments for the Reserve Bank to avoid further rate hikes, although elevated inflation pressures could still limit its flexibility.
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