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Weak domestic demand hits manufacturing: Australian PMI

03 March, 2015

The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) fell by 3.6 points to 45.4 in February, indicating a third consecutive month of contraction in conditions across the manufacturing sector.

Among the activity indicators, manufacturing production (down 3.7 points to 45.0) and new orders (down 3.4 points to 44.2) continued to decline, and manufacturing sales (steady at 45.3) contracted for a ninth consecutive month. The supplier deliveries (down 6.0 points to 46.9) and stock levels (down 4.4 points to 47.0) sub-indexes returned to contraction this month after brief expansions in January. Following further falls in the dollar, only the manufacturing exports sub-index signalled expansion, for a third month (unchanged at 53.9 points).

Exports growth in food and beverages sub-sector

Much of this growth in exports was concentrated in the food and beverages sub-sector, one of three manufacturing sub-sectors to expand in February (down 2.8 points to 60.1). The smaller textiles, clothing & furniture (down 3.4 points to 56.0) and non-metallic mineral products (down 2.3 points to 66.2) sub-sectors also expanded for a fourth consecutive month.

Ai Group Chief Executive, Innes Willox, said: "While there are bright patches, most notably for food & beverages and producers of building materials, weak domestic demand from businesses and households is offsetting the boost that many domestic manufacturers might have expected to flow from the weaker Australian dollar.  

"Particular drivers of flat domestic demand include the sharp drop in mining construction; the progressive closure of automotive assembly; and weak local business investment. The lower dollar has also lifted the prices paid for imported inputs, putting additional pressure on manufacturers' margins. On the positive side, the lower dollar and its further depreciation since September 2014 have boosted manufacturing export volumes over recent months.

"The weakness of domestic demand certainly provides further backing for the Reserve Bank's decision in February to reduce interest rates and it underlines the importance of using the May Budget to provide a boost to domestic activity – including by delivering on the commitment to cut the company tax rate to 28.5 per cent for all companies," Willox said.

Key findings for February

  • The Australian PMI fell 3.6 points to 45.4 in February, indicating a third month in contraction.
  • Three of the eight manufacturing sub-sectors expanded in February, if at slightly slower paces: food, beverages and tobacco (down 2.8 points to 60.1); textiles, clothing & furniture (down 3.4 points to 56.0); and the non-metallic mineral products (down 2.3 points to 66.2).
  • The machinery and equipment (up 1.4 points to 43.5); printing and recorded media (up 2.2 points to 48.3); metal products (up 1.9 points to 45.0); and wood and paper products (down 3.6 points to 41.5) sub-sectors all continued to contract this month.
  • The Petroleum, coal, chemicals & rubber products sub-index (down 6.0 points to 34.7) fell to its lowest reading since June 2009, with the rapid decline in global oil prices, the ongoing decline of local mining construction activity, and the progressive closure of automotive assembly weighing on sales of Australian-made chemical inputs and components.
  • Among the activity sub-indexes, only manufacturing exports (unchanged at 53.9 points) expanded in February. Manufacturing production (down 3.7 points to 45.0) declined for a fourth month, new orders (down 3.4 points to 44.2) declined for a third month, and manufacturing sales (steady at 45.3) recorded a ninth consecutive month in contraction.
  • Manufacturing employment contracted for a second month in February (down 1.6 points to 45.9).
  • Input costs remain elevated (up 5.1 points to 72.4), while selling prices continued to contract (down 1.4 points to 48.3). The wages sub-index increased slightly, rising 1.8 points to 55.3.

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