AUSTRALIAN manufacturing activity has hit a near three-year low as high interest rates slow the economy, an industry report shows.
The Australian Industry Group/PricewaterhouseCoopers performance of manufacturing index (PMI) fell 0.1 index points to 46.9 in July. The reading was below the 50-point level, which separated an expansion from a contraction, for the second month in a row.
It was also the weakest reading for the survey of around 200 companies since November 2005 when the PMI was 43.7. Australian Industry Group chief executive Heather Ridout said the state of manufacturing was not surprising considering the tighter financial conditions.
Data released this week from the Reserve Bank of Australia (RBA) confirmed tighter monetary times as demand for credit continued to soften with lending for housing, personal use and business grew at 11.5 per cent in the year to June. This was the slowest annual pace of credit growth since November 2002.
The RBA lifted the official cash rate four times between August last year to March to a 12-year high 7.25 per cent, to curb inflationary pressures.
However commercial banks have lifted their lending rates independently of the RBA to cover their increased funding costs from the global credit crunch.
“The economy more generally, is feeling the ongoing impacts of the Reserve Bank’s tightening of monetary policy as well as market-based rate rises,” Ridout said. “Inventories were run down significantly, suggesting continuing weaker demand and the potential for further falls in production.”
According to the report, manufacturing activity grew in five sectors during July, compared to two in June. Machinery/equipment, chemicals/petroleum and coal products, and fabricated metal products all had moderate growth from mining and infrastructure-related demand.
“Manufacturers cited positive effects on activity from solid infrastructure and mining related demand,” the report stated.
The report also revealed that production and employment fell at a slower rate in July than the previous month with stocks and new orders also falling, placing pressure on production.
Manufacturing activity increased in South Australia and Western Australia but fell in other states.