Australia's Resilient Economy: Capitalizing on Services and Manufacturing Growth Amid Export Challenges

Australia's economy is undergoing a quiet but profound transformation. While global headwinds—such as U.S. tariffs, weather disruptions, and geopolitical uncertainty—have weakened export performance, the nation's services and manufacturing sectors are surging, driven by robust domestic demand and operational improvements. The latest PMI data paints a clear picture: businesses are pivoting away from export reliance, with new orders and employment surging in sectors poised to outperform in 2025. For investors, this signals a compelling opportunity to rotate into resilient ASX 200 stocks that are capitalizing on this structural shift.

PMI Trends: A Tale of Two Sectors

The S&P Global Composite PMI for Australia hit 53.6 in July 2025, a 27-month high, reflecting a broad-based economic rebound. This growth is split between two key drivers:
1. Services Sector Expansion: The services PMI accelerated to 53.8 in July, the fastest pace in 16 months. New business inflows surged at the fastest rate in 39 months, with domestic demand accounting for 75% of this growth. Employment in the sector rose sharply as companies hired to manage backlogs, while input cost pressures, though rising, were offset by pricing power.
2. Manufacturing Sector Recovery: After six months of contraction, manufacturing returned to expansion in July with a PMI of 51.6. New orders rebounded, driven by domestic demand, while export orders stabilized. Cost pressures eased slightly, and companies began passing higher input costs to customers, signaling improving pricing discipline.

The divergence between these sectors is striking. While export-related industries like mining face headwinds, services and manufacturing are thriving on the back of domestic strength. This shift mirrors a global trend: economies are prioritizing self-reliance and nearshoring, and Australia is no exception.

Strategic Sector Rotation: Why Now?

The PMI data reveals three key trends that justify a tactical shift into services and manufacturing stocks:
1. Narrowing Export Reliance: Export orders in manufacturing contracted at a 4-year low in July, while services export demand stabilized. Domestic demand now accounts for 68% of total new orders, up from 58% in mid-2024.
2. Expanding New Orders: Services companies saw new business rise at the fastest rate since 2022, with hiring accelerating to pre-pandemic levels. Manufacturing firms, though still cautious, are ramping up production to meet domestic demand.
3. Cost Control and Pricing Power: Input cost inflation in services eased slightly in July, while manufacturing companies began passing higher costs to customers. This suggests improving margins, a critical factor for long-term profitability.

ASX 200 Leaders: Fortescue, Lynas, and the New Guard

The ASX 200's services and manufacturing stocks are now delivering standout results, with several names standing out for their operational excellence and alignment with PMI-driven trends.

1. Fortescue (ASX: FMG): The Iron Ore Titan

Fortescue's performance in 2025 has been nothing short of extraordinary. The company delivered 55.2 million tonnes of iron ore shipments in July, surpassing analyst estimates by 2.1%. Its hematite C1 costs fell to $16.29/wmt, a 10% improvement year-on-year, driven by operational efficiencies and lower fuel costs.

With FY26 guidance upgraded to 195–205 million tonnes, Fortescue is well-positioned to benefit from Australia's domestic infrastructure boom and global demand for steel. Its cost discipline and scale make it a standout in a sector where margins are under pressure.

2. Lynas Rare Earths (ASX: LYC): Supply Chain Resilience

Lynas Rare Earths has capitalized on the green energy transition, with sales surging 24.5% year-on-year to $170.2 million in July. The company's partnership with Korean manufacturer JS Link to develop a rare earth magnet plant in Malaysia underscores its strategic alignment with global supply chain resilience.

With rare earths critical to EVs and renewable energy tech, Lynas is poised to benefit from both domestic and international demand, even as exports stabilize.

3. PEXA Group (ASX: PXA): Digital Transformation

PEXA's recent partnership with NatWest Bank to digitize UK property transactions highlights its dominance in a sector undergoing rapid digitalization. The company's share price surged 14% in early July, reflecting confidence in its expansion strategy.

Investment Thesis: Why Act Now?

The case for rotating into these stocks is compelling:
- Domestic Demand Momentum: With Australia's services and manufacturing sectors growing at 6.2% and 4.8% annualized rates, respectively, companies with strong domestic exposure will outperform.
- Operational Improvements: Firms like Fortescue and Lynas are demonstrating cost control and innovation, key drivers of long-term value.
- Low Export Beta: As global trade volatility persists, stocks with minimal export exposure (e.g., PEXA, Regis Healthcare) offer downside protection.

Risks to Consider

While the outlook is positive, investors must remain mindful of:
- Input Cost Inflation: Services sector input costs rose 3.8% in July, up from 3.2% in June.
- Geopolitical Uncertainty: Trade tensions could reignite, dampening export recovery.
- Valuation Multiples: Some ASX 200 stocks trade at premium valuations, requiring careful due diligence.

Conclusion: A Tactical Shift for Long-Term Gains

Australia's economic story in 2025 is one of resilience and reinvention. As the services and manufacturing sectors gain momentum, investors who rotate into these resilient ASX 200 leaders—Fortescue, Lynas, PEXA, and others—stand to benefit from both near-term growth and long-term structural trends. The PMI data is clear: the future belongs to companies that thrive on domestic demand, operational excellence, and strategic agility.

Investment Advice: For a tactical allocation, consider overweighting services and manufacturing stocks with strong balance sheets and pricing power. Fortescue and Lynas offer exposure to commodity-driven growth, while PEXA and Regis Healthcare provide diversification into non-commodity sectors. Monitor PMI data for early signals of sector rotation and adjust positions accordingly.

The market is not always rational, but in this case, the numbers speak for themselves. The time to act is now.