Australia's manufacturing sector returned to growth in early 2019

Michael Dodge / Getty Images
  • Australia’s manufacturing sector returned to growth in early 2019 after stalling late last year.
  • New orders, capacity utilisation and employment all improved, a good sign for business investment, activity levels and hiring in the months ahead.
  • Margin pressures remained acute. There were also isolated reports of firms having difficulty in obtaining finance.
  • Separate activity gauges from Australia’s services and construction sectors will be released next week. They are a significantly larger part of the Australian economy than the manufacturing sector.

Australia’s manufacturing sector returned to growth in early 2019, recovering after activity stalled for the first time in over two years in December.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) rose to 52.5 last month in seasonally adjusted terms, up 2.5 points on the upwardly-revised 50.0 reading of December.

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 52.5, activity levels improved modestly in January.

“January saw a mild improvement in sales, new orders, exports and production compared with December for many manufacturers,” the Ai Group said.

“Conditions remain more favourable for food and beverages manufacturers than those in other sectors, with exports and new orders looking especially promising.”

The breakdown of the headline PMI reading can be seen in the table below supplied by the Ai Group.

Ai Group

Aside from a big decline in inventories of finished goods, the six remaining activity subindexes registered a modest improvement compared to December.

New orders returned to growth, pointing to the likelihood of firmer activity levels in the months ahead. Capacity utilisation also improved sharply — a good outcome when it comes to the outlook for business investment.

After shedding staff a month earlier, firms also reported that they increased staffing levels in January.

The Ai Group said the improvement was helped by firm demand from infrastructure, government and mining firms.

“Respondents in Victoria reported positive conditions relating to infrastructure, commercial construction and government contracts,” the Ai Group said.

“Other states benefited from defense and mining maintenance projects.

“Several machinery manufacturers said they cut short their usual summer shut-down in order to meet demand from other businesses that are undertaking upgrades or maintenance work during their summer lull.”

However, while there was a modest improvement compared to December, margin pressures remained acute with input costs continuing to rise faster than selling prices during the month.

“Input prices remain elevated for energy-intensive sectors, reflecting their ongoing problems with high input costs for gas and electricity,” the Ai Group said.

“Business margins remain very tight as wage and input costs continue to grow but cannot be passed on.”

Some manufacturers reported difficulties in finding suitably skilled staff, while others noted concerns from customers about the ability to obtain finance.

“A small number of machinery and equipment makers noted difficulties among business customers in obtaining finance for new machinery and equipment, which is affecting sales and orders for some types of equipment manufacturers,” the Ai Group said.

That’s yet another sign that it’s not just the housing market that is being impacted by tighter lending standards.

The bounce in the Ai Group’s PMI fits with the improvement seen in the separate flash manufacturing PMI released by the Commonwealth Bank earlier this month.

However, the latter’s services PMI reading went in the other direction, falling to the lowest level in the history of the survey. The services sector is the largest part of the Australian economy, and is also the largest employer.

Confirmation from the Ai Group’s Performance of Services Index (PSI) early next week will only intensify concerns about a broader slowing in the Australian economy.

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