Australia's manufacturing sector has never been stronger

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  • Activity levels across Australia’s manufacturing sector improved at the fastest pace on record last month, according to the Australian Industry Group’s latest PMI report.
  • Employment, deliveries and new orders all grew at the fastest pace on record.
  • Firms are reporting increasing margin pressures, including from higher wage growth to workers.

Activity levels across Australia’s manufacturing sector improved at the fastest pace on record in March, led by broad-based improvements in new orders, employment and exports.

The Australian Industry Group’s (Ai Group’s) Performance of Manufacturing Index (PMI) jumped to 63.1 in seasonally adjusted terms in March, surpassing the previous record high of 62.1 set in May 2002.

“March marked an eighteenth month of expanding or stable conditions for the Australian PMI, the longest run of continuous expansion since 2005,” the Ai Group said.

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 63.1 in March, not only did activity levels improve from February, they did so at the fastest pace on record.

Mirroring the strength in the headline index, the Ai Group said stronger growth was seen across each of the survey’s seven activity subindexes in March, led by new orders, employment and deliveries which all hit the highest level on record.

The table below shows the performance of individual subindexes in March, comparing the result to that seen in February and the average level over the past 12 months in trend terms.

Source: Ai Group

Along with stronger growth in sales, exports and supplier deliveries, indicating that current demand is incredibly robust, the new orders subindex, as a lead indicator, suggests this strength will persist in the months ahead.

Fitting with that view, demand for workers also improved with firms adding to their staffing levels at the fastest pace on record.

“After a sustained period of expansionary activity in 2017, more manufacturers are becoming confident enough to employ more staff,” the Ai Group said.

It added that “concerns about skill shortages and wage pressures are emerging in some sub-sectors”, fitting with the rapid improvement in wage growth reported during the month.

Adding to the bullish manufacturing report card, the group said capacity utilisation across the sector also hit the highest level ever recorded, something it says points to stronger investment levels in the period ahead.

“Capacity utilisation in March reached a record high of 81.2% of existing capacity,” the Ai Group said.

“With new orders also tracking strongly, this suggests more manufacturers will need to increase their investment and employment in order to increase their capacity to meet future demand.”

That would be welcome news to the Reserve Bank of Australia (RBA) who are banking on stronger business investment and employment growth to help boost economic activity, assisting a gradual increase in wage and inflationary pressures that, in time, will allow the bank to begin normalising interest rates.

Topping off the March report, the Ai Group said seven of the eight sub-sectors it monitors also recorded an improvement in activity levels from February, indicating that the headline strength was board-based in nature.

“Three of the eight sub-sectors reached record highs including petroleum, coal, chemical and rubber products, metal products and machinery and equipment subsectors,” it said.

While a welcome result, Innes Willox, CEO of the Ai Group, said challenges still remain despite noticeably stronger operating conditions across the sector.

“While production and sales volumes are very strong, continuing input price pressures — notably for energy, a revival of wage levels and a further lift in the number of businesses reporting difficulty in hiring skilled staff — are combining to constrain margins and the capacity for further expansion,” he says.

Following the release of today’s manufacturing report, the Ai Group will release activity reports for Australia’s services and construction sectors in the day ahead.

Similar results to that seen in the manufacturing report will only help to bolster confidence that the Australian economic activity is continuing to improve in early 2018.

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