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The lower dollar is helping Australian manufacturing pick up steam

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Activity levels across Australia’s manufacturing sector grew at the fastest pace since 2010 last month, adding to evidence that Australia’s economic transition away from mining-led growth to that powered by non-mining sectors is gathering momentum.

The Ai Group’s manufacturing purchasing managers index (PMI) rose by 2.0 points to 53.5, leaving it at the highest level seen since July 2010.

It was the eighth consecutive month that the index came in above the 50 level that indicates activity levels are expanding, and took the series three-month average – a better gauge on the overall trend in activity levels – to 52.3, also the highest level seen since July 2010.

According to the Ai Group, all bar the surveys employment subindex recorded a reading above 50 with modest accelerations registered in production, supplier deliveries, sales and new orders, both originating from home and abroad.

The surveys production subindex, in particular, was incredibly strong, rising to 60.1, marking the fastest acceleration in activity levels seen since December 2004.

“It suggests a catch-­up period may be in train, after several months of expansion in exports and new orders,” said the Ai Group.

With new orders and exports coming in at 52.4 and 53.7 respectively, the signs are looking promising for continued growth in production in the months ahead.

While most of the surveys activity levels expanded modestly, by individual sector the performance was nowhere near as uniform with four sectors seeing activity levels contract while four saw activity levels grow.

Activity levels at food, beverages and tobacco manufacturers recorded the strongest expansion at 61.7. It was the strongest acceleration seen since January 2015.

At the other end of the spectrum, the gauge metal products manufacturers came in at 44.1, continuing the contraction that has been ongoing since September 2010.

Despite the mixed performance by sector, Innes Willox, CEO at the Ai Group, believes the lower Australian dollar is playing a crucial role in the turnaround in the sector.

“The manufacturing sector had a running start to 2016 with another month of expansion recorded for February,” said Willox following the release of the February report.

“Production, sales, new orders and exports all lifted in February to consolidate the gains made by manufacturers over the second half of 2015. There is little doubt that greater competitiveness in export markets and in the domestic market due to the lower dollar is central to this turnaround.”

“With firmer expectations of the dollar remaining at or about its current level, confidence is building and businesses are readjusting their strategies, giving a higher priority to domestic activities both internally and along their supply chains.”

Although the current trend is encouraging, Willox believes that “fragilities remain” with the sector “vulnerable to international volatility and adverse domestic policy changes”.

“Many businesses are being adversely impacted by the higher costs of imported inputs associated with the lower dollar. Businesses are also finding that supply chains are taking time to rebuild after the “hollowing out” that characterised the extended period of weakness for the sector in recent years,” say Willox.

Over the coming days the Ai Group will release separate gauges on Australian service and construction sector activity levels.

Given they are a much larger proportion of the Australian economy than what they once were, particularly services, these readings will likely be closely scrutinised to see whether the rebound in the manufacturing sector is being felt in other non-mining sectors of the economy.

In recent months they haven’t, tempering optimism over the outlook for business activity levels in the year ahead.

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