Australia's manufacturing sector is humming like a well-oiled machine

LUKE FRAZZA / AFP / Getty Images
  • Australia’s manufacturing sector is humming like a well-oiled machine in the latter parts of 2018, continuing to build upon the momentum seen in recent years.
  • New orders and exports continued to grow at a decent clip in October, suggesting that momentum will continue in the months ahead.
  • Despite robust operating conditions, the Australian Industry Group says that plenty of challenges still lie ahead.

While Australia’s manufacturing sector is not the biggest part of the Australian economy, for what it lacks in size it’s making up for in performance at present.

It’s humming like a well-oiled machine in the latter parts of 2018, continuing to build upon the momentum seen in recent years.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) came in at 58.3 in October after seasonal adjustments, down 0.7 points on the level reported in September.

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 58.3, while activity levels improved at a slightly slower pace last month, they continued to improve nonetheless.

Activity levels have now improved for 25 consecutive months, the longest stretch of continuous growth since 2005.

“The strength of Australia’s manufacturing sector continued into October with production, domestic sales and new orders all growing at encouraging rates,” said Innes Willox, CEO of the Ai Group.

“Employment also lifted, although at a slower pace than in September.”

While employee wages also moderated during the month, the pace of improvement was still incredibly strong, helping to bolster confidence that broader wage pressures across the economy may also follow suit.

Importantly, while input prices continued to grow at a rapid pace, and faster than selling prices to customers, the pace of the increase was slower, indicating a modest easing in margin pressures.

This table from the Ai Group shows the survey’s activity subindexes, measuring the movement in individual components compared to a month earlier and the average seen over the past 12 months.

Ai Group

Like the headline PMI, a reading above 50 indicates an improvement from a month earlier with the distance away from 50 indicating how fast the improvement was. The figures are presented in trend terms to help smooth out volatility seen from month to month.

Like the activity subindexes, all manufacturing sub-sectors except for machinery and equipment manufacturers saw activity levels improve from a month earlier in trend terms, indicating broad-based strength across the sector.

“The machinery and equipment sector dipped into negative territory as lower sales to rural businesses and higher costs for imported inputs linked with the lower Australian dollar contributed to a weaker performance,” the Ai Group said.

However, given the speed of the improvement in most parts of the sector, along with continued strong growth in new order and offshore demand, there’s little doubt that the near-term outlook for manufacturers is more than solid.

Longer-term, however, Willox said that challenges remain.

“While manufacturers are working hard to sustain these robust conditions, the uncertainties hanging over energy prices and energy policy continue to cloud the medium and longer-term outlook, particularly for the more energy-intensive segments of the industry,” he said.

“The economic uncertainty is also impacted by drought, global trade disputes, the fluctuating dollar, declining consumer sentiment, fallout from the Royal Commission on lending and the looming Federal election.”

While all clearly threats, for the moment, things are looking good for the sector.

Following the release of today’s report, markets will receive updated activity gauges from Australia’s services and construction sectors early next week.

In September, there were more than a few worrying signs in these significantly larger parts of the economy. Any continuation of those themes in October will only act to amplify simmering concerns that recent strength in Australian economy in the first half of the year may not be repeated in the quarters ahead.

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