Australia's manufacturing sector slowed before the federal election

Matt Cardy / Getty
  • Conditions for Australia’s manufacturing sector continued to improve in May, albeit at a slower pace than April.
  • New orders, exports and capacity utilisation all eased from a month earlier. Production levels were near-unchanged and margin pressures remained intense. However, staffing levels were increased.
  • Energy prices remain a major concern for manufacturing firms. /strong>

Conditions for Australia’s manufacturing sector continued to improve in May, albeit at a slower pace than April.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) fell to 52.7 after adjusting for seasonality, down 2.1 points on the 54.8 level seen in April.

This PMI measures perceived changes in activity levels across Australia’s manufacturing sector from one month to the next. Any figure 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 52.7 last month, activity levels improved at a slower pace than April.

“While Australia’s manufacturing sector continued to grow in May, performance was mixed across the range of manufacturing industries and there are signs of further softening in the months ahead,” said Innes Willox, Ai Group CEO, in a statement released alongside the May update.

That softening, as Willox described it, was evident in the movements in the survey’s subindexes last month.

New orders, deemed to be a lead indicator on activity levels in the period ahead, eased to 52.3 points after seasonal adjustments, down 3.3 points from the level seen in April.

Exports were also close to unchanged from the level of a month earlier. Like the headline PMI, a subindex figure above 50 indicates an improvement from the prior month.

Capacity utilisation, also regarded as a lead indicator on business investment, also fell sharply, declining 4.2 percentage points to 78.8%.

Ai Group

Elsewhere, margin pressures remained intense with input prices continuing to increase faster than final prices to customers. Inventories of finished goods also stabilised despite a sharp slowdown in production levels.

However, despite reduced output levels and weaker outlook, firms indicated that they increased staffing levels at a faster pace than in April.

The lift in staffing levels may reflect optimism that demand may start to improve following Australia’s federal election.

“Manufacturers are hoping that the resolution of political uncertainties associated with the election will provide a base for a return to more robust conditions,” said Willox.

“As one member put it in responding to the survey, ‘elections kill business’.”

However, Willox said firms still have concerns about the operating environment looking ahead, especially when it comes to energy prices.

“The medium-term outlook remains clouded by the prospect of uncompetitive prices for gas, both for direct industrial use and as a critical input into electricity generation,” he said.

Australia’s manufacturing sector accounts for around 6% of the economy. In the coming days, the Ai Group will release PMIs for the services and construction sectors, significantly larger parts of the Australian economy.

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