Australian manufacturers say economic conditions have started to improve

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  • An improvement in economic conditions has seen Australia’s manufacturing PMI lift to a seven-month high.
  • Production, sales, exports and new orders all improved noticeably in April.
  • Activity gauges on Australia’s services and construction sectors — far larger parts of the economy — will be released in the coming days.

Activity levels across Australia’s manufacturing sector improved at the fastest pace in seven months in April, helped by a perceived improvement in economic conditions.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) jumped to 54.0 after seasonal adjustments, up 3.8 points on the level reported in March.

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 54.8, activity levels improved noticeably last month after a period of relative softness earlier in the year.

“Respondents … reported improving economic conditions in April,” the Ai Group said.

“The current range for the Australian dollar is supporting export orders. Infrastructure projects, particularly in New South Wales and Victoria, are supporting demand for machinery and equipment along with metals products.”

Mirroring the lift in the headline PMI, most activity subindexes strengthened during the month with production, deliveries, exports and sales all rising at a decent clip.

In what is a good sign for activity levels in the months ahead, new orders also improved sharply to 55.6, up from 50 in March. Like the headline PMI, a reading above 50 indicates an increase from a month earlier.

Capacity utilisation across the sector also improved, jumping to 83%, well above the 77.8% average level seen in the prior 12 months.

While still acute, margin also pressures weakened marginally with input prices growing at a slightly slower pace while increases in selling prices accelerated.

The only real disappointment came from readings on employment and wages with growth in hiring slowing sharply while wages increased at the slowest pace since October 2017.

Ai Group

By individual category, the Ai Group said the massive food and beverages sector — the largest in the country — drove the improvement last month. At 61.8, its subindex suggests activity levels are booming.

Solid improvements were also seen across other categories, although conditions continued to deteriorate for manufacturers of machinery and equipment, along with metals products.

“Some respondents attributed this lull in demand to uncertainty arising from the Federal election, with customers reportedly delaying investment purchases until after the election,” the Ai Group said.

“Businesses that directly supply the construction sector mentioned the negative impact on demand for their products arising from the downturn in the housing market and credit tightening.”

Outside of uncertainty created by the election and the ongoing downturn in the housing market, respondents said elevated energy prices still remain the largest concern facing the sector.

While, from a broad perspective, the April report is welcome news, it’s worthwhile pointing out that manufacturing is now a far smaller part of the Australian economy, accounting for less than 7% of GDP and total employment.

In the days ahead the Ai Group will release separate PMIs for Australia’s services and construction sectors, far larger parts of the economy.

In recent months they have not been anywhere near as strong as the manufacturing gauge, hinting that the slowdown in the economy in the second half of last year continued in the March quarter.

If the services and construction sectors also record an improvement as seen in the report today, it will help to alleviate concerns that sluggish economic growth is becoming entrenched.

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