Business activity cools as rate rises continue to bite

The Australian economy is slowing after a slight improvement in business activity last month.

Surveying of services and manufacturing firms in March shows private sector output shrinking after improving in February.

Judo Bank's "flash" purchasing management index (PMI), which provides an early indication of where the final survey results will land, fell from 50.6 in February to 48.1 in March.

A reading below 50 indicates an overall decrease for the month.

Judo Bank chief economic advisor Warren Hogan said the PMI results confirmed the economic slowdown that started in 2022 was continuing into 2023, with the composite output and new orders falling in March to their lowest levels since the Delta lockdowns in 2021.

"The March results are consistent with a soft landing for the Australian economy in 2023 and 2024 as the economy responds to higher interest rates," he said.

The services activity index fell from 50.7 in February to 48.2 in March, sinking for the fifth time in six months despite a recovery in February.

The manufacturing index also fell to 48.7 in March after returning a 50.5 reading in February. 

Mr Hogan said labour demand was easing across manufacturing and services firms but indicated Australian businesses were still looking to expand their workforces in early 2023. 

"This should ensure that any potential rise in the unemployment rate in response to weaker economic growth will be moderate," he said.

Price indicators also continued their downward trend but remained elevated. 

Mr Hogan said it was impossible to say whether inflation would be back within the Reserve Bank target in a reasonable time frame or not, with service industry input prices particularly high by historical standards.

"This suggests that both labour costs and energy prices are inflationary and could maintain upward pressure on many prices across the Australian economy in 2023."

He said it would be a "very close" call between a pause and another rate hike for the RBA next month, with recent financial instability and strong employment numbers feeding into the complexity. 

Following the collapse of Silicon Valley Bank and UBS's takeover of Credit Suisse, financial regulators have ramped up their bank monitoring regimes.

While the Australian Prudential Regulation Authority's intensive supervision continues, its investigations have so far reinforced its belief that Australian banks, including smaller banks, are well-capitalised and have access to enough liquidity.

Rapid action from regulators and authorities in the US and Europe has so far stabilised markets and improved confidence, although some volatility remains.