Australia’s private sector continued to expand in December, though growth momentum eased, according to the latest flash PMI data from S&P Global. This suggests a softer yet still resilient end to 2025 for the Australian economy.

The headline S&P Global Flash Australia Composite PMI Output Index dropped to 51.1 in December from 52.6 in November. While this marks the lowest reading in seven months, it remains above the 50 mark that separates expansion from contraction. The result extends the current expansion to fifteen consecutive months, indicating ongoing growth across both services and manufacturing sectors.

The slowdown in activity reflected weaker growth in both sectors. The Services PMI Business Activity Index fell to 51.0 from 52.8, affected by increased competition and a more modest rise in new export business. In contrast, manufacturing showed relative resilience, with the Manufacturing PMI rising to 52.2 from 51.6, supported by stronger demand for goods and improved export orders.

New business inflows continued to support activity, but at a slower pace than in November. New orders in services softened, while growth in goods export orders helped offset weaker services export momentum, leaving overall new export business growth steady from the previous month.

Labour market conditions remained supportive, with firms continuing to add staff to manage workloads. Some hiring was conducted in anticipation of stronger activity ahead. Confidence about the outlook improved notably, with the Future Output Index reaching its highest level since June. Businesses cited expansion plans, new product launches and expectations of better economic conditions as drivers for growth in 2026.

Higher employment combined with efficiency gains helped reduce work backlogs for the eighth consecutive month, driven mainly by falling services backlogs. However, manufacturing backlogs rose for the first time in eight months.

Inflationary pressures intensified towards year-end. Input cost inflation accelerated in both sectors, with goods input prices increasing at their fastest pace in eight months due to stronger demand and longer supplier delivery times. Firms responded by passing on these higher costs to customers, pushing output price inflation to a three-month high and back to its long-term average. Manufacturers reported a renewed rise in selling prices.

Overall, the December PMI data indicate an economy still expanding but balancing between slowing growth momentum and persistent cost pressures as it enters 2026.

From a monetary policy perspective, the December PMI data paint a mixed picture for the Reserve Bank of Australia (RBA). Although headline activity remains in expansion, the clear slowdown in growth momentum, with the composite index at a seven-month low, supports the RBA’s view that restrictive policy settings are gradually easing demand. However, the renewed acceleration in input costs and output prices is less favourable. Sticky services inflation and a rebound in manufacturers’ pricing power suggest that disinflation may be uneven.

For the RBA, the data reinforce a “higher for longer” stance on interest rates: growth is cooling but not contracting, while price pressures remain too strong to consider near-term easing. A sustained softening in demand indicators will likely be required before the Bank gains confidence that inflation is returning to target on a durable basis.

Market expectations for rate hikes are rising, with Citi forecasting two RBA rate increases in 2026, in February and May, amid elevated inflation risks.

Despite these insights, the December PMI data offer limited directional impetus for the Australian dollar (AUD). The easing in activity growth points to softer domestic momentum, but the re-acceleration in input and output price pressures supports expectations that the RBA will maintain restrictive monetary policy for longer. This combination reduces downside risks for the AUD in the near term, particularly against low-yielding currencies, but is unlikely to trigger a sustained rally without clearer signs of renewed growth or easing inflation abroad.

Near-term AUD movements are therefore expected to be driven more by global risk sentiment, developments linked to China, and shifts in US rate expectations rather than domestic PMI data alone.

Original Source: Eamonn Sheridan of investinglive.com