Australia's manufacturing sector is going from strength to strength

Michael Ochs Archives/Getty Images

Australia’s manufacturing sector enjoyed a strong start to the year with activity levels improving at a decent clip, building upon the momentum seen throughout 2017.

The Ai Group’s Performance of Manufacturing Index (PMI) came in at 58.7 points in January in seasonally adjusted terms, up 2.5 points from the level reported in December.

This index 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 58.7, January’s reading indicates that activity levels not only improved last month, they did so at a faster pace.

That’s goods news, adding to a raft of economic indicators that have been strengthening in recent months.

Activity levels across the sector have either held steady or improved for 16 consecutive months, the longest stretch of continuous improvement since 2005.

Adding to the positive January report card, the Ai Group said all seven activity subindices improved from a month earlier.

“This marks a third consecutive month in which all seven activity sub-indexes have expanded,” the group said. “Six of the seven activity indexes accelerated in January, with only the employment sub-index decelerating a touch.”

Of note, production levels and sales grew at a rapid pace while the new orders index — a lead indicator on future activity levels — also logged an impressive increase.

“Ongoing growth in new orders suggests further expansion for parts of manufacturing is likely in 2018,” the Ai Group said.

“Participants noted increased activity for manufacturers who are supplying upcoming infrastructure projects and the mining industry,”

This table from the group reveals how each activity subindex fared in January compared to December. The Ai Group uses trend to eliminate month-to-month volatility in each series.

Source: Ai Group

While the headline figure and internals of the report were nothing but strong, the performance by individual manufacturing sub-sector was a little more mixed, taking some of the gloss off the overall result.

“Five of the eight sub-sectors expanded in January, one sub-sector was stable and two contracted [in trend terms],” the Ai Group said, adding that “large differences in conditions are evident”.

“The petroleum, coal and chemicals sub-sector’s index rose to its highest monthly result since at least 2009, while the textile, clothing and other sub-sector recorded its lowest monthly result since at least 2009.

“Expansion accelerated in the food and beverages sub-sector and the metal products sub-sector”.

So in some sectors activity levels were booming while in others they were weak, indicating that the recent improvement was not unilateral in nature.

Of note, the Ai Group said some firms indicated that they are “losing export share again due to strong international competition and possibly due to recent rises in the Australian dollar since late 2017”.

The Australian dollar has rallied more than 7% against the greenback since early December. It’s gains against other major currencies have been more modest in scale.

While the higher Australian dollar is creating headwinds for some exporters, it’s clear that those sectors reliant upon the domestic economy are faring well at present.

The Ai Group will release separate reports on Australia’s services and construction sectors early next week.

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