Australian manufacturing activity has stalled during July

Just four of twelve sectors reported growth in the month, down from ten in June. Machinery & equipment was the strongest performer in July and improvement was seen in chemicals, petroleum & coal products and food & beverages. The largest falls were concentrated among the consumer-based sectors, and particularly in paper, printing & publishing and wood, wood products & furniture.

Production, supplier deliveries, employment and exports all recorded slower growth. More positively, input cost increases moderated sharply for the second consecutive month. 

Ai Group Chief Executive, Heather Ridout, said that the latest Australian PMI® indicates manufacturers are continuing to do it tough, with weakness particularly marked in the consumer-based sectors.

"Clearly any rise in interest rates will be imposed on a sector that's struggling in the face of formidable cyclical and structural pressures. Further interest rate hikes would reinforce the cyclical weakness evident in housing and construction and would be bad news for the industry and for activity in states such as Victoria, New South Wales and South Australia, which are particularly vulnerable to manufacturing's fortunes.

"In our view, the discussion on interest rates should focus more on the risks of them being lifted rather than the risks of them not," Ridout said.

PricewaterhouseCoopers Industrial Products Leader, Graeme Billings, said an earlier tentative upturn in manufacturing was struggling to gain traction, as higher fuel prices and the May increase in interest rates were curtailing the recovery in household spending.

"The immediate outlook for the sector remains challenging, and suggests manufacturers cannot simply wait for stronger volume growth to deliver improved profitability. Manufacturers must constantly search for ways to become more innovative in both products and processes, and strive to become leaner and more cost competitive," Billings said.

Australian PMI® Key Findings in July:

- The Australian PMI® fell 4.8 points to 49.7.
- Production and supplier delivery growth slowed sharply, while new orders and inventories fell slightly. Employment declined for the 13th consecutive month. Export growth also slowed.
- Input cost increases moderated sharply for the second consecutive month.
- Four sectors reported growth, down from ten in June. Activity was mixed across the sectors, following earlier upturns in a range of areas sensitive to consumer and construction demand.
- Growth was also more mixed across states. Only Queensland, WA and NSW reported growth in July, while activity fell in the other three states. 
- Partly reflecting seasonal factors, production declined across manufacturing firms of all sizes.