Australia's manufacturing sector continues to grow

Photo by Michael Dodge/Getty Images

Australia’s manufacturing sector continued to grow in January, adding to signs that the economy’s transition is gaining traction.

The latest Ai Group manufacturing purchasing managers index (PMI) came in at 51.5, the seventh consecutive month that a reading above 50 had been recorded.

While down 0.4 points on December, the stretch of growth is now the longest seen since 2010.

Like all PMIs, a reading above 50 is deemed neutral, implying no change in activity levels. A reading above 50 indicates that activity levels are expanding.

While the headline index continued to point to a modest expansion in activity levels, the internals of the report were, on balance, slightly disappointing.

Much of strength in January was due to a huge restocking in inventory levels with the survey’s stocks subindex jumping 10.7 points to 59.2.

That increase, along with 1.0 and 0.8 point gains for supplier deliveries and production, helped to offset weaker readings for new orders, employment, exports and sales.

The latter was particularly disappointing, slumping 9 points to 44.1, a figure deep in contractionary territory.

The table below, courtesy of the Ai Group, reveals the internal movements within the index over the month. Like the headline PMI index, a figure above 50 suggests that activity levels expanded.

While the headline index continues to point to a modest expansion across the broader sector, that performance was not unilateral across the board with four sub-sectors expanding over the month while four sub-sectors contracted.

According to the Ai Group, wood & paper products, petroleum, coal, chemical & rubber products, food, beverages and tobacco along with textiles, clothing, furniture and other manufacturing all saw activity levels expand during the month.

At the other end of the spectrum, non-metallic mineral products and machinery and equipment continued to contract.

Despite ongoing growth across the sector, Ai Group chief executive Innes Willox believes it’s still some way off until manufacturing makes a meaningful contribution to Australia’s economic rebalancing.

“The manufacturing sector opened 2016 by continuing the positive momentum built over the second half of 2015,” said Willox.

“The benefits of the lower dollar continue to accumulate with local manufacturers enjoying greater shares of the domestic market and increased export opportunities. The ongoing strength of new orders points to further growth in the months ahead, notwithstanding the contraction in business for automotive supply chains and the further decline in orders from the resources sector.”

“While the overall growth is clearly encouraging, there is still a considerable way to go before manufacturing is contributing fully to the much-needed diversification of the domestic economy.”

Later in the week, the Ai Group will release PMI gauges for Australia’s services and construction sectors. Given they make up over 90% of Australian economic output combined, the performance of these indices will provide a better indication on the current state of Australia’s economic rebalancing.

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