Following the surprise improvement in November 2023, it was reported that the Westpac-Melbourne Institute Leading Economic Index moderated to a nearly flat 0.01% in December 2023.
Although subdued, this marks the second positive reading after fifteen consecutive months of contraction.
The six-month annualized growth rate in the index, ‘which indicates the likely pace of economic activity relative to trend three to nine months into the future’, was nearly flat at 0.01%, easing from 0.18% in November 2023.
Recent surveys indicate that the economy has benefitted from increased activity in mining and retail.
However, this uptick appears to have been largely due to commodity price movements, and may only prove temporary given weakening demand.
Broadly speaking, the macroeconomic picture appears to be stabilizing but is not necessarily indicating an uptick in the cycle.
Commenting on yesterday’s NAB Business Confidence survey, Chief Economist of the National Australia Bank, Alan Oster, argued that macroeconomic fundamentals were showing some signs of stability in that slowing growth in the final quarter of last year could ‘translate into improvement in inflation’.
Flash PMIs
Manufacturing PMI
The Judo Bank Australia Manufacturing PMI showed a marked improvement from the December 2023 reading of 47.6 to a January 2024 expansion of 50.3.
This was significant since this was a return to expansion territory (i.e., over 50) after ten consecutive months of contraction in the manufacturing space, partly owing to the challenges of delays in global supply chains amid geopolitical conflicts in the Middle East.
The measure also snapped a four-month streak of falling manufacturing PMIs.
Although employment, new orders, and output continued to contract, these were at a decelerating rate.
In addition, the business confidence component registered a five-month high.
This follows yesterday’s National Australia Bank’s Business Confidence Index, which continued to show a contraction, although the measure improved from (-)8 in the previous report to (-)1 in December 2023.
Services PMI
The Services PMI remained in contractionary territory at 47.9 for January 2024, led by a slowdown in new business orders.
Although this was an uptick from 47.1 in the previous month, the flash index has remained sub-50 since September 2023 amid slowing growth in the final quarter of the year.
Hiring continued although at a slower rate, while costs increased sharply even as the demand picture weakened.
Composite PMI
The composite PMI saw an uptick to 48.1 after experiencing the two deepest contractions of 2023 in November and December; was also the highest reading since September 2023.
In December 2023, the composite PMI stood at 46.9.
Weak overseas demand and new business orders continued to decline even as costs kept rising amid hampered global logistics.
Looking ahead
The second consecutive positive reading in the Westpac-Melbourne Institute Leading Economic Index suggests the economy may be moving towards greater stability particularly as interest rates are expected to come down.
Overall, the underlying economy appears to be showing signs of improvement, although services and the composite PMI have remained in the negative (below 50) zone.
Market analysts will continue to closely pay attention to commodity prices and geopolitical developments.
The Reserve Bank of Australia shall hold its next policy meeting on February 5th-6th, 2024.
This article first appeared on Invezz.com
