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Australia's Private Sector Contracts in May Amid Persistent Inflationary Pressures

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Australia's Private Sector Contracts in May Amid Persistent Inflationary Pressures

Australia's private sector contracted in May as high inflationary pressures continued to weigh on the economy.

The headline seasonally adjusted S&P Global Flash Australia PMI Composite Output Index dropped to 47.8 from 50.4 in April, marking the sector's second contraction in three months, according to a Thursday press release.

The downturn reflected a modest reduction in manufacturing output for the fourth consecutive month. Services activity also slipped back into contraction, though the rate of decline was softer than that witnessed in March.

Additionally, new orders across the entire private sector fell at the fastest rate since September 2021, highlighting how demand continues to be weighed down by uncertainties surrounding the conflict in the Middle East.

Consumer sentiment remained pessimistic in May, driven by energy market volatility and oil price shocks tied to regional tensions. While the Westpac Consumer Sentiment Index rose 3.5% to 83, any score below 100 indicates pessimism among consumers.

This weak sentiment followed a sharp spike in household spending in March, driven primarily by higher fuel and transportation costs amid escalating geopolitical friction. Earlier this month, the Australian Bureau of Statistics (ABS) reported that seasonally adjusted household spending for March climbed 1.6% month-on-month.

S&P Global noted that manufacturers are bearing the brunt of these rising expenses, particularly higher fuel and shipping prices. Concurrently, shipping delays have continued to disrupt regional supply chains.

The downturn has also begun hitting the labor market. Employment shifted into contraction. The overall rate of job shedding across both the services and manufacturing sectors was the fastest recorded in over five-and-a-half years, said S&P.

This private-sector data aligns with recent broader economic indicators. Official ABS data for April showed that Australia's unemployment rate jumped to 4.5%, with the number of employed individuals falling by 19,000.

"Overall, the demand environment deteriorated further, as signaled by a faster and solid reduction in orders, which led to a fresh fall in output and encouraged firms back into retrenchment mode when it came to workforce numbers," S&P Global Market Intelligence economist Eleanor Dennison said.

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