Australian Business Confidence Hits Pandemic-Era Low in June PMI

Australian business confidence collapsed to its lowest level since the pandemic in June, even as the headline composite PMI edged back toward the expansion threshold, the S&P Global flash survey showed.

The Composite PMI Output Index rose to 49.8 from 48.7 in May, leaving it a fraction below the 50.0 mark that separates growth from contraction. Services activity broadly stabilised after a slight dip the prior month. Manufacturing output continued to shrink, with the pace of decline little changed from May.

The demand side told a different story. New orders fell solidly for the fourth consecutive month since March. Firms cited market uncertainty as the dominant factor weighing on new business. The weakness was not confined to the domestic economy – new export orders also declined at the end of the second quarter.

Business confidence deteriorated sharply, dropping to its lowest level since March 2020. Stripping out that pandemic-distorted month, sentiment was the weakest in the survey's decade-long history. The services sector drove the confidence decline. Manufacturers reported a modest improvement in their own outlook, with optimists pointing to expansion plans and hopes for a pickup in orders.

Despite falling new business, firms added staff in June, reversing a rare decline recorded in May. Hiring was modest across both manufacturing and services as companies sought to build capacity ahead of anticipated future projects. The combination of rising headcount and shrinking order books allowed businesses to clear accumulated backlogs at the fastest rate in more than two and a half years.

Inflation pressures eased further. Input cost increases moderated for the second month running and were at their least intense since March. Fuel and transportation costs remained the most commonly cited source of upward pressure. Some manufacturers reported that suppliers had consolidated deliveries to cut shipping costs, contributing to a further lengthening of delivery times. Output price inflation also slowed to its weakest pace since February, with both sectors raising charges at a more modest rate.

S&P Global Economics Director Andrew Harker described the private sector as standing at a crossroads. He noted that the drop in oil prices following the US-Iran cessation of hostilities memorandum and any recovery in shipping flows through the Strait of Hormuz could provide further relief to the supply-chain disruption still affecting manufacturers. The news and data flow in the coming weeks would be key to assessing the future direction of the Australian economy, he said.

For the Australian dollar, the data reinforces a weakening domestic growth pulse without providing a clear catalyst for a move. The composite PMI near stabilisation is unlikely to shift Reserve Bank of Australia expectations on its own. The confidence reading at a historic low and the four-month streak of new orders declines signal that the private sector is bracing for deterioration rather than recovery, which has implications for forward consumer spending and business investment. The divergence between hiring and orders is a pattern that, if sustained, could precede weaker employment.

On the inflation side, the further easing in input and output price pressures will be welcome at the RBA, particularly with fuel and transport cited as the primary remaining drivers. Any additional relief from lower oil prices and Hormuz normalisation could accelerate the disinflation trend, giving the central bank more room to hold its policy rate steady.

Final June PMI readings are scheduled for July 1 for manufacturing and July 3 for services and the composite.