Interest Rates and the High Dollar Impact Manufacturing Activity

5 Jan 10

Manufacturing activity fell slightly in December after four consecutive rises, reflecting drops in production, new orders and input deliveries, according to the latest Australian Industry Group - PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI®). The seasonally adjusted index slipped 2.7 points in December to 48.5, just below the 50 point level separating expansion from contraction.

Companies cited the strong Australian dollar, recent interest rate rises and the weak global economy as having a negative impact on activity.

Ai Group Chief Executive, Heather Ridout, said: "This month’s Australian PMI® outcome shows a mild softening of manufacturing activity and confirms that the recent recovery remains patchy. The improvement in new orders which had driven stronger production has tailed off. Those sectors which have benefited from economic policy stimulus, largely the consumer and construction related sectors, are continuing to grow. Overall though, the weak world economy, a still modest improvement in the domestic market and the Australian dollar still at high levels are still dampening the sector."

PricewaterhouseCoopers Global Head of Industrial Manufacturing, Graeme Billings, said: "Manufacturers facing the long-term pressures of a higher Australian dollar and competition from lower cost economies are continuing to face a squeeze on manufacturing profitability which shows no signs of abating. The weakness in manufacturers' markets here and overseas is keeping pressure on pricing while input prices and wages costs continue to grow. The key to successfully navigating these difficult conditions is a strong focus on cost and cash flow management."

Australian PMI® Key Findings for December:

• The seasonally adjusted Australian Industry Group - PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI®) fell slightly, down 2.7 points to 48.5 for December, just below the 50 point mark separating expansion from contraction.
• December's results reflect modest falls in production and input deliveries, a marginal decline in new orders and a slight increase in inventories.
• Across manufacturing, six sectors recorded higher activity in December, down from eight in the previous month.
• The textile, clothing & footwear and transport equipment sectors recorded significant rises in activity in December.
• Activity fell in the paper, printing & publishing, and food & beverage sectors.
• Ongoing caution amongst buyers resulted in the new orders index falling 3.3 points.
• Manufacturing employment expanded slightly albeit at a slower rate than in November.
• The high exchange rate together with rising interest rates constrained manufacturing growth in December.

Download the full December 2009 Australian PMI®.