BOOM: Australian manufacturing hits a 12-year high

Photo: Streeter Lecka/ Getty Images.

This is not an April Fool’s joke.

Activity levels across Australia’s manufacturing sector expanded at the their fastest pace in over a decade in March.

The Ai Group manufacturing purchasing managers index (PMI) jumped by 4.6 points to 58.1, leaving the index at the highest level seen since April 2004.

The PMI measures changes in activity levels from one month to the next, with 50 signifying that activity levels were unchanged from one month earlier. At 58.1, this signals that manufacturing activity levels are not only expanding, but roaring higher.

Even excluding the fact the series tends to be volatile, the series’ three-month average — a better gauge of the overall trend — rose to 54.4, a level not seen since June 2010.

While a far smaller industry that which it once was, this is a good sign that Australia’s economic transition is gathering momentum, fitting with recent improvements in recent business indicators.

Like the headline reading, the internal composition of the March report was equally impressive.

Production and employment expanded strongly while new orders and exports, lead indicators for future demand, jumped by 9.3 points and 3.5 points to 61.7 and 57.2 respectively.

The table below, supplied by the Ai Group, reveals the impressive internal details. The sub-indices use three-month moving averages, providing a better guide to the overall trend in each.

By sector, five of eight saw activity levels improve from one month earlier with the largest — food, beverages and tobacco — jumping 9.3 points to 71.0, marking the fastest expansion seen in the history of the survey.

Understandably, Innes Willox, CEO of the Ai Group, was impressed with the result.

“Growth in manufacturing production, sales, employment, exports and new orders fueled a surge in March,” said Willox. “Significantly, the important machinery and equipment subsector, which has been buffeted by the step-down in mining investment and the fading auto assembly sector, moved out of contraction in March for the first time in more than four years.”

Willox suggests the lower Australian dollar has played a major role in the recovery, seeing activity levels expand for the past nine months, the longest stretch seen since 2006.

“The strong manufacturing performance and its expansionary run since the middle of 2015 are in large part due to the boost provided by the lower Australian dollar,” he said.

“Even though the dollar has appreciated quite strongly since mid-January, the local currency is still close to 30 per cent lower against the US dollar and almost 20 per cent lower against the Trade Weighted Index compared with three years ago.”

“The positive impacts of this depreciation have taken some time to accumulate as businesses have become more confident that it will be sustained. With momentum positive and new orders growing strongly, the positive trend appears to have some way to run.”

Of course, the Australian dollar has appreciated significantly over the past month, providing a test to the sector should it be sustained for a considerable period of time.

“The sharp lift in the value of the Australian dollar over the past two and a half months will test some manufacturers and, if maintained, can be expected to slow the pace of recovery over the months ahead,” said Willox.

Market attention will now turn to the Ai Group’s services and construction PMI reports that will be released next week. Should those significantly larger sectors show a similar improvement, it suggests that Australia’s economic rebalancing is gathering pace.

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