Australian Industry Group (Ai Group) Chief Executive, Heather Ridout, said the drop in manufacturing activity in June was not unexpected, following the sharp deterioration in orders over the past few months, reflecting emerging weakness in the current economic climate.
“Pressures on manufacturers from factors such as the high dollar and interest rates and the weaker global economy are being compounded on the ‘supply side’, by rapid increases in the costs of fuel and other key inputs such as steel and agricultural goods. The decision by South Pacific Tyres to shut its factory in Melbourne last week in part reflected these cost pressures and the difficulty in competing with low cost, emerging economies.
“These effects are squeezing profit margins and employment prospects in the sector. As the construction sector and consumer spending continues to soften over coming months, manufacturers are likely to face further squeezing in activity and margin. As well, exporters are still finding it tough in this appreciating Australian dollar environment.
“Economic policy will need to strike a fine balance between engineering a slowdown in inflation and avoiding too sharp a slowdown in economic growth and employment,” Ridout said.
PricewaterhouseCoopers Global Leader of Industrial Manufacturing, Graeme Billings, said: “The decline in the Australian PMI® for June signals that slower demand and rising input costs are putting significant pressure on manufacturing profitability.
“Aside from these cyclical pressures, the additional pressure on profit margins from the ongoing strength in the Australian dollar and its implications for manufacturers’ competitiveness in both domestic and export markets highlights the need for stringent cost management and a renewed focus on raising productivity,” Billings said.
- The Australian PMI® fell by 4.2 points in June, the key drivers of softness being slower growth in the domestic economy, notably in housing construction due to higher interest rates. Slower domestic demand is being compounded by weaker global growth and the high Australian dollar.
- Activity expanded in two sectors in June, compared to six in May.
- Production, employment and new orders all fell solidly in June, while inventory growth remained firm. Supplier deliveries rose marginally. Exports fell for the second consecutive month.
- Input costs grew strongly again in June, while selling prices growth softened modestly, suggesting some margin squeeze.
- Growth in wages also eased slightly and for the fourth consecutive month. Capacity utilisation also fell in line with lower production.
- Manufacturers cited positive effects on activity from solid mining and mining-related construction demand. On the negative side were weaker orders; skills shortages; raw material costs, especially steel and petrol; slower housing related demand; and the Western Australian gas outage.
- Reflecting the mining boom, activity rose strongly in Western Australia, but declined in all other states.
