Now Australia's high-flying manufacturing sector is slowing down rapidly

Cameron Spencer/Getty Images
  • Activity levels across Australia’s manufacturing improved at the slowest pace in over a year in November.
  • New orders fell for the first time in over two years, pointing to the likelihood of weaker activity levels in the coming months.
  • Activity has been weakening in Australia’s services and construction sectors for several months, hinting at a broader slowdown in the Australian economy from the levels seen earlier in the year.

Momentum across Australia’s manufacturing sector slowed sharply in November, adding to concerns about the broader economic outlook.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) slumped to 51.3 last month in seasonally adjusted terms, down seven points on the level reported in October.

It was the lowest level since October 2017.

“Manufacturers reported expanding, albeit slowing conditions in November, led by the non-metallic minerals sector and the large food and beverages sector,” the Ai Group said.

“Manufacturing conditions were stronger in Victoria and South Australia but fell into contraction in New South Wales and Queensland.”

This PMI measures perceived changes in activity levels across Australia’s manufacturing sector from one month to the next. Anything above 50 signals that activity levels are improving while a reading below suggests they’re deteriorating. The distance away from 50 indicates how quickly activity levels are expanding or contracting.

So at 51.3, while activity levels still improved last month, they did so at the slowest pace in more than a year. On top of a recent pullback in activity levels in Australia’s services and construction sectors in prior months, the result will do little to appease concerns that strong economic growth in the first half of 2018 is unlikely to be repeated in the quarters ahead.

Like the headline PMI, the Ai Group said all bar inventories of finished goods weakened from the levels reported in October.

Of note, measures on new orders — a lead indicator on activity levels in the months ahead — tumbled by 10.1 points to 48.7, registering the first outright decline in orders placed since September 2016.

“This suggests tougher conditions ahead for manufacturers in some sectors,” the Ai Group said.

With production and export also slowing, firms said they shed staff last month, albeit by a marginal amount.

“This index was buoyant in the first half of 2018, reaching a record high in March 2018 but the index been trending down over the last few months,” the Ai Group said.

Indicating that margin pressures intensified from October, the measure on input costs rose to 75.0, a significantly faster increase than for selling prices over the same period.

“Food and beverage manufacturers reported higher prices for raw agricultural inputs,” the Ai Group said.

“Input prices also remain elevated for petroleum, coal, chemical and rubber products, metal products and machinery and equipment, reflecting their ongoing issues with high energy input costs.”

As yet, the group said the “effects of the falling oil price over the past month cannot be seen as it has yet to flow through supply chains”.

Ai Group

While activity levels across the sector have improved in each of the past 26 months — the longest stretch of uninterrupted growth since 2005 — Ai Group Chief Executive Innes Willox says “there are clouds on the horizon”.

“While it is too early to say that winter is coming for the sector, there are clouds on the horizon with new orders falling into contraction,” he says.

“Drought conditions in New South Wales and Queensland are now having an adverse impact on input costs and sales for some manufacturers and uncertainty over the direction of energy prices and policy is weighing heavily on the more energy-intensive parts of the sector.”

Following the release of the manufacturing PMI, market attention will now turn to separate reports on activity levels across Australia’s services and construction sectors from the Ai Group that will be released in the coming days.

These larger sectors have been weakening for several months, adding to evidence that the broader Australian economy is slowing.

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