Australia's manufacturing sector just slowed sharply

Bill Pugliano/Getty Images
  • Activity levels across Australia’s manufacturing sector slowed sharply last month.
  • Higher production costs, including wage pressures, were cited as factors behind the slowdown.
  • Sale fell sharply during the month, while production, employment and new order growth slowed rapidly.

Activity levels across Australia’s manufacturing slowed sharply last month, growing at the slowest pace in close to a year.

Higher production costs, including a sharp increase in employee wages, was seen to be a major factor.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) slumped to 52.0 points in July after seasonal adjustments, down 5.4 points from June.

It was the weakest result since October 2017.

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 52.0, activity levels still improved in July, just at a substantially slower pace than the levels seen earlier in the year.

Activity has improved for 22 consecutive months, the longest stretch of continuous growth since 2005, although the momentum is clearly slowing.

“The Australian PMI has indicated positive conditions for 22 consecutive months but has slowed since reaching a record high in March 2018,” the Ai Group said.

“Infrastructure projects continue to support demand for manufacturing products, but rising energy costs and growing wage pressures are constraining activity.

“Many respondents noted an increase in wage rates from 1 July — including this year’s minimum wage increase of 3.5% — that are pushing up their labour input costs.”

That was reflected in hiring levels in July which slowed sharply, falling 7.8 points to 50.3, only just above the 50 level that indicates steady employment levels.

“This signals that the recovery in manufacturing employment might be stalling,” the Ai Group said. “The ABS estimates that manufacturing employment reached 940,000 in May 2018, its highest level since August 2012.”

The subindex measuring average wages rose 1.8 points to 60.6, indicating employee wages grew at a decent clip during the month.

Ai Group

While good news for manufacturing workers in the near-term, there were some troubling signs for activity levels in the medium to longer-term with production growth slowing sharply while inventory levels increased at a faster pace.

New orders — a lead indicator on future activity levels — also grew at a substantially slower pace while exports actually declined, albeit marginally.

Sales fell sharply, declining at the fastest pace since early 2016.

Margin pressures were also evident with input costs continuing to rise substantially faster than selling prices over the month.

By sub-sector, the Ai Group said activity levels improved in five of the eight industries monitored.

“Expansions were stronger in the larger sub-sectors of food and beverages, petroleum, coal and chemical products, non-metallic minerals and machinery and equipment,” it said.

“The smaller sub-sectors of wood and paper products and the ‘textiles, clothing and other manufacturing’ sub-sectors contracted in July.”

While activity levels continued to improve last month, it’s clear the positive momentum seen earlier this year is now starting to reverse.

Looking ahead, markets will be keeping an eye for upcoming PMI reports on activity levels across Australia’s services and construction sectors in the days ahead.

A similar performance from these significantly larger sectors — especially services — would be troubling for the outlook for the broader Australian economy in the second half of the year.

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