The housing downturn, drought and election uncertainty is weighing on Australia's manufacturing sector

Matt Cardy/Getty ImagesTough slog for manufacturers.
  • Momentum in Australia’s manufacturing sector slowed in March.
  • The downturn in the housing market, caution ahead of the Federal election and ongoing impact of the drought in the eastern states were the chief catalysts cited to explain the weak result.
  • Activity measures on Australia’s services and construction sectors — far larger parts of the economy — will be released in the coming days. They will provide markets with an early indication on how the economy fared in early 2019.

Momentum in Australia’s manufacturing sector slowed in March, weighed down the downturn in the housing market, caution ahead of the Federal election and ongoing impact of the drought in the eastern states.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) fell to 51.0 last month in seasonally adjusted terms, down three percentage points on the level reported in February.

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 51.0, activity levels still improved last month, albeit marginally.

As seen in the chart below, activity across the sector has either improved or remained stable in each of the past 31 months, although the pace of improvement has slowed noticeably from the levels seen throughout much of the past two years.

“Respondents reported slower conditions in March 2018,” the Ai Group said in a statement.

“Some attributed this to a generally slowing local economy while others said their customers are delaying purchases until after the Federal election.

“The downturn in housing construction is slowing demand for building-related products, while the drought continues to detract from demand for machinery, equipment and other products for the agricultural and rural sectors.”

As seen in the table below, most activity subindexes weakened compared to February. Like the headline PMI, a reading of 50 or indicates an improvement from a month earlier after seasonal adjustments have been applied.

Ai Group

Production, employment and exports grew at a slower pace while supplier inventories, inventories of finished goods and sales all went backwards.

“Sales were particularly weak in the ‘building materials, wood, furniture and other’ manufacturing sector in March as well as in energy-intensive sectors including chemicals, machinery & equipment and metal products,” the Ai Group said.

New orders — seen as a lead indicator on activity levels in the months ahead — were also unchanged from a month earlier, indicting there’s unlikely to be much of a rebound, if any, across the sector as we approach the middle of the year.

Margin pressures also remained acute with input costs and wages continuing to increase substantially faster than selling prices.

By manufacturing sub-sector, the Ai Group said the modest improvement across the sector last month was narrow in nature, driven primarily by strong growth in food and beverages, along with the textiles, clothing, footwear, paper and printing sub-sectors, masking far weaker results in other areas.

Given the divergent results in the March survey, Ai Group Chief Executive Innes Willox said that manufacturers will be looking to tomorrow’s Budget for a “boost in business and consumer confidence.”

Australia’s Federal Budget will be handed down on Tuesday evening.

That will be followed by separate PMI reports from the Ai Group on Australia’s services and construction sectors on Wednesday and Friday respectively. These are significantly larger parts of the Australian economy, and will provide markets an indication as to whether the steep deceleration in the economic activity seen in the second half of last year continued in the March quarter of 2019.

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