Survey data point to soft-landing growth alignment
Australia’s composite PMI climbed to 51.8, signaling renewed private-sector expansion as input costs ease and hiring strengthens. Equities rose, led by ASX:BHP and ASX:RIO, reflecting confidence that the RBA has reached peak tightening.
Private-sector surveys indicate a firming expansion across Australia’s manufacturing and services sectors, with the composite Purchasing Managers’ Index (PMI) rising to 51.8 in October from 49.9 — its first sustained reading above the neutral 50 threshold since mid-2023. The improvement reflects a broad-based rebound in new orders and export activity, particularly within professional services and construction, as firms gain confidence that the Reserve Bank of Australia’s (RBA) tightening cycle has peaked. This upturn is supported by global disinflation, easing supply constraints, and a measured recovery in China’s commodity demand, with iron ore prices steady near USD 110 per tonne (SGX:FEF).
Underlying drivers point to a rebalancing of capacity use and input-cost pressures. Input price inflation slowed to its lowest rate in three years, aided by falling freight costs and energy normalization. Although wage pressures persist, productivity gains in tech-enabled industries are helping to offset them. Business-to-business credit conditions have also improved, with the B2B credit index rising 4.5 percent quarter-on-quarter, suggesting improved liquidity and healthier corporate cash flows. The employment sub-index climbed to 53.2, indicating that firms are re-entering hiring cycles, which could translate to 20,000–25,000 new jobs per month through the end of 2025.
Macro implications extend beyond short-term output. Rising business activity is bolstering tax receipts, easing fiscal consolidation needs, and potentially reducing net issuance of Australian Commonwealth Government Bonds (ACGBs) in 2026. The yield curve flattened modestly, with two-year yields up to 4.05 percent and ten-year yields steady at 4.32 percent, reinforcing expectations of a slow and measured policy-normalization path. Equities reflected the shift in tone: the ASX 200 advanced 1.4 percent for the week, led by industrials and miners, with BHP (ASX:BHP) up 1.9 percent and Rio Tinto (ASX:RIO) up 2.3 percent.
Historical analogues suggest early-cycle PMI recoveries often precede earnings troughs by roughly two quarters. If the composite index sustains readings above 51 for three consecutive months, consensus FY 2026 corporate earnings forecasts could swing from –1.2 percent year-on-year to +4 percent. The rebound also aligns with regional trade patterns — exports to ASEAN markets rose 5.7 percent year-on-year in September, compensating for weaker Chinese demand. Meanwhile, foreign direct investment inflows from Japan and South Korea reached AUD 5.2 billion in Q3, the strongest level since 2018.
Risks remain tied to external developments. A sharper U.S. slowdown could weigh on Australia’s resource exports, while global credit repricing could widen domestic spreads. Nonetheless, Australia’s net foreign liability ratio has declined to 38 percent of GDP from 45 percent in 2021, providing a buffer against external funding volatility. The structural rebalancing toward services exports — education and tourism now at 90 percent of pre-COVID levels — further strengthens medium-term resilience.
Key forward indicators to monitor include business credit growth, running at an annualized 6.1 percent, and private-sector capital expenditure intentions, which tend to lead realized investment by two quarters. If these trends hold into Q1 2026, GDP growth could accelerate from 1.6 percent to around 2.2 percent, validating Australia’s soft-landing narrative. Markets will closely watch whether the RBA formally pivots toward a neutral bias, which would anchor yields and extend equity valuation support through mid-2026.
