Things are looking brighter for Australia's manufacturing sector

Justin Sullivan/Getty Images
  • Activity levels in Australia’s manufacturing sector improved at the fastest pace in five months in February.
  • Production levels, sales, exports and employment all rose from a month a month earlier.
  • There is clear evidence that Australia’s housing market downturn is now starting to weigh on some specific sub-sectors.
  • PMIs for Australia’s services and construction sectors — accounting for over 90% of the Australian economy — will be released early next week.

Things are looking brighter for Australia’s manufacturing sector in early 2019, at least in comparison to what was seen late last year.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) rose to 54.0 last month in seasonally adjusted terms, up 1.5 points on the 52.5 reading of January.

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 54.0, activity levels improved at the fastest pace in five months during February.

“Australia’s manufacturing sector strengthened in February after faltering in the closing months of 2018 and clawing back some lost ground in January,” said the Ai Group’s Chief Executive Innes Willox.

“Production, sales, exports and employment all gained ground.”

However, while a strong result, pockets of concern still remain.

As seen in the table below from the Ai Group, new orders — seen as a lead indicator on activity levels in the future — rose only fractionally last month, and a slower pace than January.

Margin pressures also remained acute with selling prices continuing to lift at a substantially slower pace than input costs.

“Businesses’ margins remain tight, as wage and input costs continue to grow at a stronger pace than selling prices,” the Ai Group said. “Higher costs are difficult to pass on to customers.”

Like the headline PMI, a reading above 50 indicates an increase from one month earlier.

Ai Group

Along with sluggish growth in new orders and continued margin pressures, there was also clear evidence that Australia’s housing market downturn is now starting to weigh on some manufacturing sub-sectors.

“The drop off in residential construction activity is flowing along supply chains with both the metal products and the building, wood products and furniture sub-sectors contracting,” Willox said.

“The important machinery and equipment sub-sector was flat while chemicals and food and beverages, the latter the largest manufacturing sub-sector, maintained healthy levels of growth despite weather-related challenges.”

Uncertainty surrounding the results of upcoming elections in New South Wales and Australia, along with elevated energy costs and skill shortages, were cited as the major concerns for manufacturers in the months ahead.

“A small number of respondents in NSW are concerned that impending Federal and state elections are dampening consumer confidence and hence their forward orders,” the Ai Group said.

“Businesses in all states remain very concerned about mitigating their energy costs and about growing skill shortages for experienced, technical and specialist tasks.”

While, from a broad perspective, the rebound in activity levels in recent months is welcome, it must be put into context given manufacturing only accounts for around 6% of the Australian economy.

Early next week, the Ai Group will release separate PMIs for the far larger, services and construction sectors. The recent trends in those industries haven’t been all that reassuring, particularly for the construction sector.

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