Manufacturing downturn adds weight to calls for fiscal stimulus: Australian PMI

| January 8, 2020

The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) increased slightly by 0.2 points to 48.3 in December, marking two consecutive months of contraction in the Australian PMI for the first time since mid-2015.

With new orders again in negative territory in December and trending down since March, the current weak conditions for manufacturers are likely to continue into the New Year, with the strong food & beverages sector a notable exception.

Ai Group Chief Executive Innes Willox said that 2019 closed on a disappointing note for Australian manufacturing with production and employment both weaker in December.

“The main bright spots were the food & beverages sector, which extended the upward trend recorded by the Australian PMI since 2012, and manufactured exports which are benefitting from the competitive level of the Australian dollar relative to other currencies,” Mr Willox said.

“The machinery & equipment and chemicals sectors remained broadly stable in the month while other manufacturing sectors contracted. Producers linked to construction and housing suffered from the entrenched slump in these areas of activity with drought and adverse weather also taking their toll.

“The downturn in manufacturing recorded in November and December is a clear warning of the growing risk of a more broad-based slackening of an economy already in the slow lane. It adds weight to the view that serious consideration should be given to further fiscal stimulus.”

Four of the seven activity indices in the Australian PMI contracted in December, with the recent weakness in new orders continuing, if at a milder rate of contraction (up 1.6 points to 48.8). Employment dropped further into negative territory (down 1.3 points to 46.0) and was joined by the finished stocks index (down 8.2 points to 44.4). More positively, supplier deliveries (up 6.8 points to 52.1) and exports (up 4.2 points to 54.0) rose into expansion.

Among the six manufacturing sectors in the Australian PMI, only food & beverages expanded in December (up 0.6 points to 61.8) while machinery & equipment (down 1.0 points to 50.4) and the chemicals sector (down 0.9 points to 49.3) were broadly stable. The metals products (up 0.6 points to 45.0), building materials, wood & other manufacturing (down 3.4 points to 38.1) and TCF, paper & printing (down 0.1 points to 41.6) sectors all contracted again in December (trend).

Manufacturing businesses selling products to the construction sector reported reduced demand as a result of a downturn in residential construction activity and weather-related disruption.

The input prices index fell a further 5.1 points to 58.9 – the lowest result since April 2016 – indicating manufacturing input price increases slowed markedly in December, but selling prices fell back into contraction (down 3.7 points to 47.5).

The average wages index fell a further 1.7 points to 55.1 in December, indicating wages rose at a slower pace than in November.

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*readings below 50 points indicate contraction in activity, with the distance from 50 indicating the strength of the contraction.