Manufacturing Continues to Contract for a 4th Straight Month

5 Oct 08

Manufacturing activity fell for a fourth successive month in September, impacted by a weakening world economy and a decline in new orders affected by higher official and commercial interest rates which continue to squeeze consumer demand.

The Australian Industry Group - PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI®) showed despite slowing activity, September was a relatively stable month for manufacturing with the PMI up by 0.2 points to 47.2 and remaining below the key 50.0 level separating expansion from contraction..

According to Australian Industry Group (Ai Group) Chief Executive, Heather Ridout, the ongoing decline in new orders reported in the Australian PMI® suggests that the weakness in manufacturing is likely to persist, particularly with employment growth showing signs of losing momentum.

Ridout also said a further reduction in official interest rates by the Reserve Bank would be welcomed to help ease these conditions.

PricewaterhouseCoopers Global Leader of Industrial Manufacturing, Graeme Billings, said given the continuing uncertainties in the world economic outlook, these pressures on manufacturers and profitability is unlikely to ease over the next few quarters.

“In the absence of any short-term improvement in the economic outlook, businesses need to continue with stringent cost management and to maintain a focus on building long-term profitability through broadening of market and product scope, deepening global supply chains and strengthening their skills bases,” Billings said.

However, exports rose solidly in September and manufacturers continued to cite positive effects on activity from mining related demand.

Key Findings

• Manufacturing activity fell for a fourth successive month in September.
• The seasonally adjusted Australian Industry Group - PricewaterhouseCoopers Australian PMI® was stagnant in
• September, up by 0.2 points to 47.2, but remaining below the 50 point mark separating expansion from contraction.
• Driving this month’s result, the lagged effects of higher official and commercial interest rates continue to squeeze consumer and housing-related demand. In addition, slower trading partner growth has compounded the impact of the high exchange rate on demand for Australian manufactures in both domestic and overseas markets.
• Production fell again in September, though at a slightly slower rate than in August, in line with continued declines in new orders.
• Input and wages costs grew strongly again in September, while selling price growth eased mildly, with the net effect a compression of profit margins.
• Employment fell for a seventh consecutive month. Inventories rose marginally and supplier deliveries fell slightly. Exports rose solidly.
• Manufacturers continued to cite positive effects on activity from mining related demand. Key negatives were: weak domestic demand; global instability; the soft housing sector; raw material costs; staff turnover; and import competition.
• Activity fell in all states except Western Australia.

Sectors

• Seasonally adjusted, activity expanded in three sectors in September, compared to four in August. Activity fell in eight sectors and was stable in one.
• The food & beverages and machinery & equipment sectors saw solid growth in September, the latter reflecting mining and infrastructure related demand. Growth in the construction materials sector was marginal, and activity was stable in miscellaneous manufactures.
• Activity fell significantly in the clothing & footwear; wood, wood products & furniture; basic metal  products; transport equipment; and chemicals, petroleum & coal products sectors.
• The textiles; fabricated metal products; and paper, printing & publishing sectors saw more moderate falls in activity.

Production and Capacity

• Seasonally adjusted, the production sub-index rose by 1.3 points to 48.7, remaining below the 50-point mark separating expansion from contraction. Unadjusted, two sectors reported higher production, eight sectors reported falls while two saw stable production.
• Production grew strongly in the food & beverages sector and solidly in the machinery & equipment sector. It was stable in the textiles and construction materials sectors.
• The clothing & footwear; wood, wood products & furniture; paper, printing & publishing; chemicals, petroleum & coal products; and miscellaneous manufactures sectors experienced sharp falls in output.
• Production fell more moderately in the basic metal products;fabricated metal products; and transport equipment sectors.
• Capacity utilisation (unadjusted) rose to 75.7% in September, up from 72.3% in August, consistent with averages over the past few years

Download the full report here.

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