Australia's manufacturing sector had a strong end to 2016

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Australia’s manufacturing sector put in a stonking performance to end 2016, expanding at the fastest pace seen since July.

The Ai Group’s manufacturing purchasing managers index (PMI) rose 1.2 points to 55.4 in December, the highest year-end reading seen since 2007.

The PMI measures changes in Australia’s manufacturing sector from one month to the next. A figure above 50 indicates that activity levels improved while a sub-50 reading suggests that they deteriorated. The distance from 50 is indicative of the strength of the expansion or decline.

At 55.4, it suggests that activity levels were expanding strongly at the end of 2016, building upon the improvement seen in the prior three months.

And, as seen in the table below from the Ai Group, the strength was broad based in nature.

Source: Ai Group

All subindices bar employment expanded strongly during the month, particularly those for exports and new orders, two lead indicators that suggest the improvement in December may continue in the early parts of 2017.

At 60.6 points and 58.2 points respectively, the measures on new orders and production touched the highest levels seen since March 2016.

Coupled with an increase in the sales subindex which jumped 5.3 points to 58.8, the Ai Group suggested that this suggests that local demand is strengthening.

While the employment subindex bucked the trend — falling 4.9 points to 47.4 — this was partially offset by a jump in the wages subindex which rose by 8.5 points to 62.3.

The Ai Group called the increase “significant”, suggesting that this may herald a pickup in manufacturing wage growth early in 2017.

Good news not only for those working in the sector, but also policymakers who are banking on an acceleration in wage growth this year to help spur on inflationary pressures.

By individual sub-sector, five of eight saw activity levels improve from November, an improvement on the performance seen earlier in the year where more often than not the majority of sectors were deteriorating.

“Both food and beverages (57.1 points) and petroleum and chemical products (56.5 points) continued to perform strongly,” said the Ai Group.

Fitting with the strength in the headline PMI reading, the group said that manufacturers indicated that demand appeared to be improving after a weak patch in the latter half of 2016, although it remained patchy across individual sectors.

“The recovery in commodity prices has led to better conditions for manufacturers exposed to the mining sector, with some revival of mining investment and maintenance spending,” it said.

“However, surging energy costs, weaker local demand and slower spending on particular major projects is depressing activity for some manufacturers.”

In the coming days, the Ai Group will release its separate PSI and PCI reports, tracking the performance of Australia’s services and construction sectors in December.

Given these sectors are far larger and economically important to the Australian economy, it will be interesting to see whether the improvement captured in the PMI is replicated in these surveys.

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