The headline return to expansion is unlikely to shift RBA rate expectations much given it was driven by staffing rather than demand, with new orders now contracting for a fourth straight month and backlogs being run down rather than rebuilt. The sharpest signal for markets is the confidence collapse to a two-and-a-half-year low, which points to businesses pulling back on hiring and investment plans over coming months unless order books turn around. Softer input and output price inflation across all five sectors will be read as modestly disinflationary at the margin, though the fragility underlying June’s bounce suggests the data carries limited durability into the second half of the year.

— Australia services PMI rose to 50.5 in June from 48.7, returning to growth on higher staffing, but new orders fell for a fourth month and year-ahead confidence dropped to its lowest since November 2023, S&P Global said.

Summary:

• The seasonally adjusted S&P Global Australia Services PMI Business Activity Index rose to 50.5 in June from 48.7 in May, signalling a marginal return to growth after May’s contraction
• Growth was centred on consumer services firms, driven by renewed staffing gains rather than stronger demand, with employment rising for the seventeenth time in the past 18 months
• New orders fell for a fourth consecutive month, with panellists citing a lack of confidence among customers, while new export orders fell for a second straight month, linked to the war in the Middle East
• Backlogs of work were reduced solidly, the largest drawdown in almost two years, as firms used spare staffing capacity to clear outstanding business rather than expand it
• Input cost inflation eased for a second month running, though it remained sharp, with higher fuel prices and wage costs widely cited; output price inflation was the weakest since January
• Confidence in the 12-month outlook fell for a second straight month to its lowest since November 2023, weighed down by concerns over the economic environment and Federal Budget tax changes, with finance and insurance the least optimistic sector
• The Composite Output Index, which blends services and manufacturing, rose to 50.4 from 48.7, with manufacturing production still contracting but at a softer pace

Australian services activity returned to growth in June, though the details of the survey pointed to a fragile expansion built on staffing gains rather than genuine demand recovery. The seasonally adjusted S&P Global Australia Services PMI Business Activity Index rose to 50.5 from 48.7 in May, a marginal increase following the prior month’s contraction, with output now having risen in two of the past three months. Andrew Harker, economics director at S&P Global Market Intelligence, said the renewed rise in activity looked positive on the surface but the details warranted caution, since the improvement was driven more by higher staffing levels than by any response to new business.

Employment rose for the seventeenth time in the past 18 months, with some firms hiring in anticipation of new projects, and companies used the extra capacity to work through a backlog that shrank by the largest margin in almost two years. New orders fell for a fourth consecutive month, however, with businesses reporting a lack of confidence among customers, while new export orders declined for a second straight month, a trend attributed to the war in the Middle East weighing on demand from abroad.

Cost pressures showed some easing. Input costs continued to rise sharply, though the pace of inflation softened for a second consecutive month, with fuel prices and wages the most commonly cited drivers. Competitive pressures limited how much of that cost increase firms could pass through, and output price inflation slowed to its weakest pace since January, easing across all five broad sectors covered by the survey.

Business confidence in the year-ahead outlook fell for a second straight month to its lowest level since November 2023, with worries about the broader economic environment and tax changes announced in the Federal Budget cited as key drags. The finance and insurance sector recorded by far the weakest optimism of the five monitored sectors, while sentiment held up best in information and communication. The Composite Output Index, which weights services against manufacturing, rose to 50.4 from 48.7, with manufacturing output still contracting, albeit at a softer pace than in May.

This article was written by Eamonn Sheridan at investinglive.com.