International trade; Manufacturing & services activity

  • Preliminary foreign trade: According to the Bureau of Statistics (ABS), in original terms, goods exports rose by 29 per cent to an estimated $36,100 million in March. Exports rose by 16 per cent from a year ago. And imports of goods rose by an estimated $2,065 million or 10 per cent to $23,760 million in March. But imports are still down by 1 per cent from a year ago.
  • ‘Flash’ Commonwealth Bank (CBA) purchasing managers’ indexes (PMI): The CBA composite PMI fell from 39.4 points in March to 22.4 points in April. The Services PMI fell from 38.5 points in March to 19.6 points in April. The Manufacturing PMI declined by 4.1 points to 45.6 points in April. All PMIs are at record lows. The CBA began the surveys in May 2016. And readings below 50 denote a contraction in activity.
  • Economic Update: The Prime Minister and Treasurer have provided updates on the economy. Applications for early release of superannuation totalling $3.8 billion will be paid by super funds in next five days.

The trade data is instructive on income flows in the economy and consumer and business activity. The CBA purchasing managers index is a timely reading on the economy, especially manufacturing and services.

What does it all mean?

  • The Commonwealth Bank’s (CBA) business activity gauges highlight the unnerving scale of the economic downturn enveloping Australia’s services and manufacturing sectors. The pace of contraction in services activity accelerated in April due to coronavirus (COVID-19) enforced government restrictions, shutdowns and social distancing measures. With job losses mounting and consumer sentiment hitting 29-year lows, customer demand fell steeply. Falling new orders and supply chain disruptions also forced companies to reduce their selling prices, impacting profitability and output as trading conditions deteriorated.
  • Aussie manufacturers – also contending with plummeting new orders – reported an unwelcome lift in input prices as the Aussie dollar weakened against the greenback and shortages in materials impacted production.
  • But it’s not all bad news. Australia is set to post a 27th successive trade surplus in March. More timely COVID-19 preliminary data was released by the Bureau of Statistics (ABS) showing that exports of goods lifted by an estimated 29 per cent in March to be up by 16 per cent on a year ago. And imported goods rose by a 10 per cent, but were still down 1 per cent on a year ago. But the data is not seasonally adjusted and did not include the hard-hit services sector.
  • Increased exports of iron ore, coal and natural gas would provide some comfort to policymakers that China may be through the worst of its COVID-19 economic downturn. In fact, shipments of iron ore – Australia’s largest export – totalled 18.1 million tonnes in the week to April 17, up from 16.2 million tonnes in the prior week according to Global Ports’ data. China’s steel rebar inventories have also declined from peaks of 13.65 million tonnes in mid-March to 10.94 million tonnes last week, according to the Beijing Custeel E-Commerce company.
  • The Treasurer has highlighted the phenomenal amount payments that are being made to households and businesses. The Prime Minister is now focussed on the post-COVID recovery and the sort of reforms that will serve to strengthen that recovery.

What do the figures show?

Preliminary international trade – March

  • According to the Bureau of Statistics (ABS), in original terms, goods exports rose by 29 per cent to an estimated $36,100 million in March. Exports rose by 16 per cent from a year ago.
  • The lift in exports in March was “predominantly driven by a $4,750 million or 20 per cent increase in the value of exports of non-rural goods and a $2,474 million or 225 per cent increase in the value of exports of non-monetary gold. The increase in the value of non-monetary gold was driven by exports to Hong Kong and the United Kingdom”, according to the ABS.
  • Also, “Within non-rural goods there were increases in exports from the resources sector including strong increases in the value of exports of coal, gas and petroleum and in particular a large increase in the value of exports of iron ore to China”, said the ABS.
  • And imports of goods rose by an estimated $2,065 million or 10 per cent to $23,760 million in March. But imports are still down by 1 per cent from a year ago.
  • The lift in imports in March was “driven by increases in capital goods, up $895 million or 18 per cent; intermediate and other goods, up $583 million or 6 per cent; and non-monetary gold, up $467 million or 85 per cent”, according to the ABS.
  • Also, “Within capital goods, there were large increases in the import of mobile phones, office and ADP machinery (including laptop computers), and aircraft. In March, imports from China regained some strength, up $300 million or 7 per cent. Driving this increase were increases in imports of consumer electronics such as mobile phones and laptop computers as well as electrical machinery”, said the ABS.

CBA ‘flash’ purchasing manager indexes (PMI): April 2020

  • The CBA composite PMI fell from 39.4 points in March to 22.4 points in April. The Services PMI fell from 38.5 points in March to 19.6 points in April. The Manufacturing PMI declined by 4.1 points to 45.6 points in April. All PMIs are at record lows. CBA began the surveys in May 2016. And readings below 50 denote a contraction in activity.
  • The PMI surveys cover senior purchasing managers in 400 Australian companies in the manufacturing and service sectors. They are surveyed each month on how output, orders, jobs, delivery times and stocks have changed relative to the previous month.
  • CBA noted, The latest Commonwealth Bank Flash Composite PMI® pointed to a much stronger contraction of the Australian private sector during April, with the decline particularly severe at service providers. The coronavirus disease 2019 (COVID-19) led new orders to fall at a steep pace, with employment scaled back markedly as a result. Both input costs and output prices decreased, but this was reflective of trends in the service sector as manufacturing inflation trends accelerated.”
  • On manufacturing sector activity:Manufacturing output decreased for the eighth successive month in April, and to the greatest extent since the survey began in May 2016. The COVID-19 pandemic reportedly led to a steep decline in customer demand, with both total new orders and new export business down markedly on the previous month. Suppliers’ delivery times continued to lengthen sharply due to the pandemic, while employment was reduced markedly. Meanwhile, the rate of input cost inflation hit a survey high, with panellists linking higher input prices to currency depreciation and supply shortages.”
  • On services sector activity: Company shutdowns and restrictions due to COVID-19 resulted in severe declines in both business activity and new orders in the Australian service sector during April. Rates of contraction were much sharper than those seen in March. Companies lowered their employment for the third month running, and at a considerable pace. Input costs decreased for the first time in the four-year survey history, mainly due to lower wages and fuel prices.”

Federal Government Economic Update

  • The Prime Minister and Treasurer gave an update on the economy. Of note:
  • The PM said “we are on the road back” and restrictions will be reviewed in three weeks.
  • There is a net 5,000 extra staff working on support and benefit payments at Services Australia and the Australian Tax Office.
  • There have been 587,686 job seeker applications processed.
  • The Tax Office has approved the early release of superannuation to 456,000 people, valued at $3.8 billion, with the average withdrawal being $8,000. Payments to be made by Super Funds over the next five days.
  • The Tax Office has paid out cash flow assistance payments to 177,000 businesses covering 2.1 million workers valued at $3 billion.
  • The $750 coronavirus cash payments to those on Government benefits, totalling $5.1 billion and covering 6.8 million people, have been paid.
  • More than 900,000 businesses have registered interest for JobKeeper; and 275,000 businesses have filled out applications
  • The Prime Minister will evaluate a raft of economic reform suggestions over coming months to assist recovery in the post-COVID recovery.

What is the importance of the economic data?

  • The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
  • The Commonwealth Bank (CBA) undertakes a survey of purchasing managers across manufacturing and services sector. The ‘flash’ or ‘early/preliminary ’readings provide timely information on the economy. As such, the survey is valuable for investors.

What are the implications for investors?

  • Conditions for Australia’s private sector businesses are especially weak. According to research from ACA Research and Fifth Quadrant of small and medium-sized businesses (SMEs), over a quarter of firms have already been forced to shut their operations temporarily or permanently due to the COVID-19 crisis. Two thirds of SMEs have also reported a 30 per cent or greater decline in revenue. Of course, the tourism, hospitality, recreation and retail trade industries have been hardest hit with job losses and reduced hours worked most acute.
  • That said, feedback from purchasing managers suggest that some business owners remain optimistic during these challenging times. The CBA reported, “Despite the severity of the current downturn, companies hope that business will return to normal over the coming year, in turn leading business activity to be higher than current levels.”
  • Of course, some savvy companies are positioning for an eventual post-virus economic recovery. While most report changing their methods of delivery and services – such as embracing online platforms – others are adjusting to demand, changing workforce structures, introducing new products and bringing forward investment plans to survive the crisis.
  • Aussies have embraced and adapted to working-from-home arrangements in a big way since the virus crisis forced us to self-isolate. The likes of Harvey Norman, Bing Lee and JB Hi-Fi – especially their online platforms – have benefitted. Today’s trade data showed that demand for electronics products surged in March with imports of Chinese sourced mobile phones, laptops and electrical machinery up by a whopping $300 million.
  • But while the trade data for March was solid, the CBA’s services and factory forward-looking indicators of trade – new export orders and businesses – both plummeted in April, implying that external demand for Aussie made goods and services will likely soften in the near term with the global recession already underway.

published by Ryan Felsman, Senior Economist, CommSec