Australian manufacturing is back in contraction territory, according to the Australian Industry Group’s (AiG) Performance of Manufacturing Index which slipped 3.4 points in August to 47.3, below the 50 contraction/expansion line.
The contraction is only mild, according to the AiG, but the decline in new orders is back below 50, down 3.1 to 48.8, and the fact that it is only “large food, beverages & tobacco (53.8 points) and the smaller wood and paper products (66.3 points)” of the eight sub-sectors that are growing makes this a really disappointing result.
According to AiG CEO Innes Willox, it’s the high Aussie dollar which is weighing on business. Respondents say it is “maintaining the intensity of import competition”.
The most important part of this survey, however, is not that manufacturing is back in contraction – as disappointing as that is – but rather that there are signs the economy recovery is stalling in housing and not spreading throughout the broader economy.
“To date we have not seen the surge in housing construction flow through to the manufacturing sectors traditionally linked to house building such as metal products and non-metallic mineral products”, Willox said.
“In part this appears to be due to higher levels of import competition and in part because the simultaneous reduction in engineering construction is detracting from demand in these sub-sectors.”
This is something the RBA board will take seriously when it meets tomorrow and although there is is little chance of a rate cut, it might be time to up the rhetoric about the Aussie dollar.
Disclaimer: Greg McKenna is an active currency trader and is carrying a tiny short Aussie dollar position at the moment.