Australian private sector economic activity picked up markedly in February 2025, with faster growth in the services sector contributing to an acceleration in the overall economy. The Australian Composite PMI rose slightly to 51.2 in February from 51.1 in January, its highest level in six months. February 2025 PMI highlights
- (Composite Output Index: 51.2 (up from 51.1 in January)
- (Services Business Activity Index: 51.4 (up from 51.2 in January)
- (Manufacturing Industrial Output Index: 50.1 (down from 50.5 in January)
- (Manufacturing PMI: 50.6 (up from 50.2 in January)
Private sector growth accelerates
The Australian private sector grew business activity at the fastest pace since August 2024, driven by a marked expansion in the services sector. New business also picked up in February, reflecting an improvement in domestic demand. Despite slowing export demand, domestic demand helped support growth in many sectors. In contrast, export demand remained in contraction, with export orders falling for the sixth consecutive month.
The acceleration in business activity growth in February was supported by a strong increase in new business in the services sector. New business in the manufacturing sector also rose for the first time since November 2022, although the growth rate in this sector has slowed since January. These developments point to an improvement in demand for goods and services, as a result of business development efforts and an expanded customer base.
Employment and business costs
Employment levels in the Australian private sector increased further in February, with the services sector recording a higher growth rate than the manufacturing sector. This expansion in employment helped to clear the backlog of work, but at the same time led to an increase in operating costs. However, companies were cautious in raising selling prices amid declining economic optimism.
The impact of interest rates on business sentiment
Manufacturing employment fell for the second time in three months as manufacturers remained cautious about hiring new employees due to concerns about the stability of the economy.
Business sentiment in both the manufacturing and services sectors deteriorated in February, with the business optimism index hitting a four-month low. Many respondents cited the negative impact of higher interest rates, as well as economic uncertainty in the domestic and global markets.
Cost inflation
Input costs rose significantly in February, reaching their highest level since last September. The rise was often attributed to higher costs of materials, energy and finance, as well as wage costs. While cost inflation eased in the manufacturing sector, the sector saw a significant increase in production costs,.
Selling price increases and competitive challenges
Despite inflationary pressures, companies continued to pass on some of the increased costs to customers through higher selling prices. However, price increases were lower than expected, as companies were reluctant to pass on all of the increases due to competitive pressures in the market.
Inflation and interest rate challenges
Inflation and rising interest rates will be key challenges for the private sector going forward. Despite rising employment and improving domestic demand, businesses may find it difficult to cope with the continued rise in input costs such as energy and raw materials. In addition, continued high interest rates could hamper businesses’ ability to access finance, impacting expansion and growth plans
External demand and international trade
While domestic demand remains a key driver of growth, external demand will continue to be an important factor driving business activity in Australia. With global challenges such as market volatility and trade tensions, Australian businesses may find it difficult to grow their exports, particularly in sectors that rely on overseas demand such as mining and natural resources.
The future of the Australian private sector
The future of the Australian private sector is expected to continue to be influenced by a number of domestic and global economic factors. Given the current economic challenges, the Australian economy could experience some volatility in performance in the short term, but some sectors, such as the services sector, could continue to see continued growth.
Services sector expansion
The current trend suggests that the services sector will be the main driver of growth going forward. Firms are expected to continue to benefit from increased domestic demand, particularly in areas such as fintech, healthcare and professional services. As consumer sentiment improves and economic activity returns to normal after periods of slowdown, this sector should continue to maintain a steady growth rate. However, challenges related to inflation.
Industrial and manufacturing sector
In contrast, Australia’s industrial sector appears to be facing some challenges in the near future. Although manufacturing activity has improved at the start of the year, slower growth in export demand, coupled with higher production costs, could hinder the sector’s expansion in the longer term. Low optimism among manufacturers could also impact their investments in expansion or improvement. However, if businesses are able to adapt to changing conditions, including shifts in global supply chains and rising raw material costs, they may have opportunities to boost productivity and achieve long-term stability.
Employment and economic challenges
In terms of employment, growth in the Australian private sector is expected to continue, although figures vary across sectors. Employment in the services sector is likely to continue to rise, while the manufacturing sector may experience a slowdown in job creation as a result of cautious hiring. Australian businesses may need to adjust their hiring strategies, requiring the development of new skills to keep pace with changes in work technologies.
