Growth in Australia's private sector softened in August as a more challenging cost environment began to weigh on the recovery, flash PMI data from S&P Global showed, even as output expanded for a third consecutive month and business confidence climbed to a six-month high.

The headline seasonally adjusted Composite Output Index eased to 52.5 in August from 53.2 in July, marking a third straight month of uninterrupted expansion in private sector output, though the pace of growth was described as moderate. The moderation still points to ongoing expansion even as momentum cools, while the more telling signal for policymakers is the reacceleration in input price inflation — the first pickup after three months of easing — concentrated more heavily in manufacturing, where fuel, freight and raw material costs rose.

Key data from the August flash release:

• Flash Composite PMI Output Index eased to 52.5 in August from 53.2 in July, marking a third consecutive month of private sector growth
• Services PMI Business Activity Index slowed to 52.9 from 53.6, while the Manufacturing PMI held at 52.0
• Manufacturing PMI Output Index slipped to 49.7 from 50.3, tipping goods producers into contraction even as new manufacturing orders grew at their fastest pace since the start of the year
• Overall new orders rose for a second straight month, with export orders improving for the first time since March on stronger international demand
• Input price inflation accelerated after three months of slowing increases, driven more heavily by manufacturing costs including fuel, freight, commodities and raw materials, with some firms citing tariff-related pressure
• Charge inflation eased to its slowest pace since the start of the year as firms absorbed a larger share of rising costs
• Employment rose for the 19th time in 20 months, though job creation was the softest in three months, while business confidence climbed to a six-month high

The expansion remained concentrated in services, where business activity continued to grow even as the rate of expansion slowed compared with July. Manufacturing output slipped into contraction, with goods producers pointing to staffing disruptions, longer supplier wait times and rising costs as the main drags on production.

New orders told a more encouraging story, rising for a second straight month and supported by gains at both manufacturers and service providers, with manufacturers leading the pickup. August also brought the first improvement in export performance since March, driven by a rebound in international demand for Australian manufactured goods. That matters because export demand can help offset softer domestic conditions, and the latest data suggests overseas orders are starting to provide some support even as firms continue to navigate uneven sector performance at home.

Cost pressures were the standout concern in the release. Input price inflation accelerated in August, breaking a three-month trend of slowing increases, with the pickup more pronounced in manufacturing than in services. Panellists frequently cited rising fuel, freight, commodity and raw material costs, along with higher supplier price lists and, in some cases, the impact of tariffs.

Despite the sharper rise in input costs, businesses were less aggressive in raising their own prices. Charge inflation eased to its slowest pace since the start of the year and ran below the series average, leaving firms to absorb a larger share of the cost increase themselves. The combination of faster input cost inflation and slower charge inflation points to building margin compression, as companies slowed their own price increases rather than passing costs through in full.

Eleanor Dennison, economist at S&P Global Market Intelligence, said the Australian private sector continued to signal expansion despite the more challenging backdrop, supported by a further improvement in order books, with business sentiment among firms rising to its strongest level in six months.

She said manufacturing had recorded its strongest injection of new work since the start of the year, even as supply chain disruption and cost pressures led to a modest drop in output, while services maintained their growth path with activity and new business expanding at a slightly slower rate than in July.

On costs, she said the trend of softening input price inflation seen since April's peak had come to an end, with businesses continuing to absorb much of the increase and margin pressure expected to persist.

Employment continued to rise, marking the 19th increase in the past 20 months, though the pace of hiring was the softest in three months and modest across both broad sectors. Backlogs of work at service providers rose slightly for a second straight month, while goods producers saw their strongest drawdown of backlogs in just over a year.

Looking ahead, firms' 12-month outlook for activity improved to its brightest level since February, with expansion plans, stronger commercial activity and hopes for improved customer confidence cited as reasons for the more upbeat mood, even as confidence remained subdued by historical standards. The six-month high in business confidence, alongside the pickup in new export orders and the improvement in new work, suggests demand conditions have been steadier than the latest slowdown in headline growth might imply.

Source: investinglive.com