Australia's services sector expanded at its fastest pace in six months during July, according to the latest S&P Global Australia Services PMI, as a renewed rise in new orders helped the sector's recovery gather momentum. A reading above 50 signals expansion, and the July result put the sector more firmly in growth territory.

The seasonally adjusted Services Business Activity Index rose to 53.6 in July from 50.5 in June, marking a second consecutive monthly increase in output and the strongest reading since the second half of the year began. The improvement carries particular weight given that services account for roughly two-thirds of Australia's economic output, making the sector's trajectory a bellwether for broader GDP performance.

Growth in business activity was concentrated in the real estate and business services and the information and communication categories, while transport and storage remained under pressure.

Total new orders increased for the first time in five months, with survey respondents reporting they had been better able to convert opportunities into new contracts during the month. New export business continued to decline, albeit at a reduced pace, with some respondents attributing the weakness to lower tourism numbers.

Business sentiment improved markedly, recovering from June's 31-month low to its highest level since just before the outbreak of war in the Middle East in February. Firms cited tentative signs of improving market conditions and expansion plans as key supports for their 12-month outlook.

That improved confidence translated into hiring, with employment increasing for a second consecutive month at a solid pace. Some firms reported filling previously vacant positions while others expanded operations. Despite the pickup in staffing, backlogs of work accumulated for the first time in five months as renewed order growth placed pressure on capacity.

On the cost side, input prices continued to rise rapidly in July, though the pace of increase eased to its lowest in five months, having peaked in April. Panellists linked cost pressures mainly to higher fuel and wage costs. Output price inflation told a different story, however, reaccelerating at the start of the third quarter to levels close to those seen in April and May. Four of the five broad sectors covered by the survey reported higher charges, led by information and communication, while finance and insurance was the only sector to lower selling prices during the month. The divergence — easing input cost growth alongside accelerating output charges — is relevant to the Reserve Bank of Australia's ongoing assessment of services inflation persistence, which has been a focal point of monetary policy deliberations as the central bank works to bring inflation back within its 2–3% target band.

The Composite Output Index, which weights services against manufacturing according to their share of GDP, rose to 53.2 in July from 50.4 in June — its fastest rate of expansion since January. For the first time in six months, output increased across both monitored sectors as manufacturing joined services in returning to growth. Australia's manufacturing PMI had previously been reported at 52.0 for July, reflecting a return to output growth.

Andrew Harker, economics director at S&P Global Market Intelligence, said the renewed rise in new orders had provided fresh impetus to the sector's expansion, though he cautioned that inflationary pressures and ongoing uncertainty tied to the Middle East situation meant growth was not guaranteed to build further in the months ahead. He added that the prognosis for third-quarter GDP was looking more positive based on the historical relationship between the PMI data and official growth figures.

The combination of the new-order recovery and the composite index's jump to its fastest expansion pace since January points to a domestic recovery gaining genuine traction rather than a one-off bounce. However, the reacceleration in output price inflation, even as input cost growth eased to a five-month low, suggests firms are using the improved demand backdrop to rebuild margins — a dynamic that could keep services inflation stickier than headline cost figures alone would imply. Business confidence recovering to its strongest level since before the Middle East conflict began in February points to a more constructive outlook among firms, though the survey's commentary notes that geopolitical uncertainty still clouds the durability of the upturn. The employment and backlog data together suggest capacity pressure is beginning to build, which could feed into wage and price dynamics if new orders continue at their current pace.