Australia’s services PMI rose to 50.7 in April from 46.3 in March, but new orders fell for a second month and input price inflation hit its fastest pace since August 2022, driven by Middle East fuel costs.

Summary:

• The S&P Global Australia Services PMI Business Activity Index rose to 50.7 in April from 46.3 in March, returning to expansion territory after a contraction in the prior month, per the S&P Global release
• New orders fell for a second consecutive month in April, with the pace of decline marginally faster than in March, with respondents citing higher fuel costs linked to the Middle East war as a key driver, according to S&P Global
• Input price inflation accelerated sharply in April to its fastest pace since August 2022, with more than 43% of respondents reporting rising input costs, while output price inflation hit its fastest rate since January 2023 as firms passed costs on to customers, per the survey
• Business activity growth was confined to just two of the five monitored sectors, information and communication and consumer services, while transport and storage, finance and insurance, and real estate and business services all contracted, according to the release
• Staffing levels rose for the sixteenth consecutive month in April, at a pace quicker than March, helping firms work through backlogs which fell at their sharpest rate since November 2024, per S&P Global
• The Composite Output Index returned to expansion at 50.4 in April from 46.6 in March, though business sentiment eased again to its lowest level in 22 months, according to the survey
• S&P Global Economics Director Andrew Harker warned that the sustainability of the activity and employment expansions remains in question given falling new orders and intensifying inflationary pressures, and said the outlook hinges on how the Middle East conflict and Hormuz disruption evolve

Australia’s services sector returned to growth in April, but the recovery rests on uncertain foundations, with new orders falling for a second straight month and fuel-driven inflation surging to its highest level in nearly four years as the economic consequences of the Middle East war continue to ripple through the Asia-Pacific region.

The S&P Global Australia Services PMI Business Activity Index rose to 50.7 in April from 46.3 in March, crossing back above the 50.0 threshold that separates expansion from contraction. The rebound was driven primarily by sustained job creation rather than demand, with rising staffing levels allowing firms to process existing work even as the flow of new business continued to weaken. Employment has now grown in sixteen consecutive months, and the pace of hiring accelerated in April relative to March.

The demand picture, however, remains troubled. New orders declined for a second successive month, and the pace of that decline was marginally faster than in March. Survey respondents identified the Middle East war as a central factor, particularly through its impact on fuel costs, which are feeding directly into purchase decisions and dampening client appetite. International new business offered a partial offset, ticking higher in April after a solid contraction in March, but not by enough to compensate for the domestic shortfall.

The inflationary dimension of the report is its most significant element for the broader economic outlook. Input price inflation accelerated sharply in April to its fastest pace since August 2022, with more than 43% of respondents signalling higher costs during the month. Firms in transport and storage recorded the steepest input cost increases of any sector covered, reflecting their direct exposure to fuel price movements, and also led on selling price inflation. Across the services sector as a whole, output prices rose at the fastest rate since January 2023 as businesses moved to recover margin through higher charges to customers.

The combination of rising costs and falling new orders produced a bifurcated sectoral picture. Activity growth was confined to information and communication and consumer services, while transport and storage, finance and insurance, and real estate and business services all contracted. The breadth of the slowdown in activity outside those two sectors underlines how unevenly the fuel cost shock is being distributed across Australia’s service economy.

At the composite level, which combines services and manufacturing, the Output Index also returned to expansion at 50.4 from 46.6 in March. Manufacturing production continued to fall, however, meaning the composite recovery is entirely services-dependent and therefore vulnerable to the same demand and inflation pressures weighing on that sector.

Business sentiment deteriorated further in April, reaching its lowest point in 22 months despite the headline activity rebound. Firms cited hopes for a swift resolution to the Middle East conflict as a precondition for a recovery in new orders, but confidence that such a resolution is imminent was notably absent. S&P Global’s Economics Director Andrew Harker captured the tension at the heart of the data, noting that the key question is whether the improvements in activity and employment can be sustained against a backdrop of falling demand and intensifying cost pressures, with the answer depending heavily on how the conflict and the disruption around the Strait of Hormuz develop in the months ahead.

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The acceleration in Australian input price inflation to its fastest pace since August 2022 is a direct transmission of Middle East energy disruption into a major Asia-Pacific economy, and will complicate the Reserve Bank of Australia’s rate calculus at a moment when domestic demand signals are already softening. The fact that more than 43% of survey respondents flagged rising input costs in a single month points to the breadth as much as the depth of the inflationary impulse. Transport and storage firms bearing the steepest cost increases will face the sharpest margin compression, with price pass-through to customers already running at its fastest since January 2023. Business sentiment sitting at a 22-month low despite a technical return to activity growth suggests the headline PMI rebound will carry limited weight with markets assessing the durability of Australia’s services expansion.

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Still to come later, the Reserve Bank of Australia decision, due at 0430 GMT / 0030 US Eastern time. Governor Bullock will spaeak an hour later: