Australia's services sector shook off a sluggish start to the year with its strongest performance in six months during July, according to a closely watched business survey. S&P Global's services purchasing managers' index (PMI) climbed to 53.6, up from 50.5 in June, signalling a clear acceleration in growth.
The PMI is a monthly survey of executives at services companies, covering everything from banking and real estate to transport and hospitality. A reading above 50 indicates the sector is expanding, while a figure below 50 points to contraction. July's jump was driven by a return of new orders for the first time in five months, improved business confidence, and firms reporting they had more capacity to take on work.
What's behind the rebound?
The recovery was not uniform across the sector. S&P Global said activity was led by real estate, business services, and information and communication, while transport and storage remained soft. Overseas demand also slipped, suggesting the bounce was largely domestic in nature.
Encouragingly, the pickup in new orders suggests that the weakness seen earlier in the year may be easing. Businesses also expressed greater optimism about the outlook, a sign that they expect conditions to improve further in the coming months.
However, the survey also flagged a renewed increase in input costs and selling prices. That could be a concern for the Reserve Bank of Australia (RBA), which has been trying to bring inflation down. If services firms keep raising prices, it could put upward pressure on inflation and complicate the central bank's efforts to ease monetary policy.
What it means for investors
For everyday investors, the services PMI is a useful gauge of the broader economy's health. Services make up the bulk of Australia's economic output, so a sustained expansion here is generally positive for corporate earnings and the share market.
The improvement in new orders and confidence could be a tailwind for companies in the services sector, particularly those in real estate, business services, and technology. On the flip side, the pickup in costs and selling prices might squeeze margins for some firms, especially those that cannot easily pass on higher expenses to customers.
The data also feeds into the interest rate outlook. If price pressures persist, the RBA may be less inclined to cut rates soon, which would affect borrowing costs for households and businesses. Investors will be watching upcoming inflation and jobs data for clues. Recent figures showed job ads rose in July, pointing to steady hiring demand, while consumer spending beat forecasts, suggesting the economy retains some momentum.
The services PMI is just one indicator, and it can be volatile from month to month. But the July reading suggests that the services sector, which had been struggling, is now finding its footing. Whether that translates into sustained growth will depend on whether new orders keep flowing and whether cost pressures ease.
For now, the data offers a cautiously optimistic picture for the Australian economy, even as the global backdrop remains uncertain. Investors will be watching to see if the momentum carries into the third quarter.
