The outlook for Australia's manufacturing sector is looking bright

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  • Activity levels across Australia’s manufacturing sector continued to improve in May, helped by stronger growth in new orders and exports.
  • The vast majority of activity subindexes, and sectors, improved during the month.
  • New orders are growing strongly, indicating that recent broad-based strength is likely to persist in the second half of the year.

Activity levels across Australia’s manufacturing sector continued to improve in May, helped by stronger growth in new orders and exports.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) came in at 57.5 in seasonally adjusted terms, pulling back slightly from 58.3 in April.

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 57.5, activity levels continued to improve at a decent clip in May, just not as fast as April.

Activity has now improved in each of the past 20 months, the longest stretch of continuous growth since 2005.

Like the headline PMI, the internals of the report were also strong with the vast majority of activity subindexes, and sectors, recording an improvement during the month.

“Five of the seven activity sub-indexes indicated expansion in May,” the Ai Group said.

Sales levels were stable while finished stocks contracted as manufacturers drew down on inventories.

The Ai Group said the latter was impacted by shortages of raw material that saw manufacturers draw down on their inventories to meet demand.

Importantly, the new orders subindex improved, pointing to the likelihood of further strength across the sector in the second half of the year.

“The new orders sub-index remained above 60 points, indicating healthy demand and a strong likelihood of further near-term growth,” the group said.

Exports also strengthened over the month, perhaps helped by recent declines in the Australian dollar.

Ai Group

Rounding off what was a solid report, the Ai Group said activity levels also improved in seven of the eight industries monitored.

“Seven of the eight sub-sectors expanded in May with only the wood and paper products sub-sector indicating stable conditions,” it said.

“None contracted.”

That outcome has rarely been seen in the history of the Ai Group survey, indicating that the strength across Australia’s manufacturing sector is now broad-based in nature.

“Sub-sectors that provide manufactured goods for large transport projects and the construction sector continue to report very strong levels of activity, particularly from the eastern states,” it said.

“Manufacturers on the east coast continue to report strong demand from the civil engineering, commercial building and defense industries.”

The AI Group will release separate activity measures on Australia’s services and construction sectors early next week.

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