Carbon tax, imports blamed for lowest manufacturing activity in 9 months

In worrying news for Australian manufacturers, industry activity dropped again during May, reaching its lowest level in nine months, according to an Australian Industry Group (Ai Group) report.

Manufacturers once again cited the strong Australian dollar, import competition and the impending carbon tax as hinderers to growth during the month, reported the seasonally-adjusted Australian Industry Group – PwC Australian Performance of Manufacturing Index (Australian PMI).

Manufacturing activity dropped 1.5 points to 42.4 in May, which is well below the 50-point level separating expansion from contraction.

The construction materials sector was hit hardest during the month, falling to 37.6 PMI points.

Only three of the twelve manufacturing sub-sectors grew during May: paper, printing and publishing (53.5); machinery and equipment (52.7); and miscellaneous manufacturing (51.4).

Queensland was the only state to record an expansion of manufacturing activity during the month.

Manufacturing wages (60.1) and input costs (64.1) continued to rise in May, and manufacturing capacity utilisation fell to 70.0.

New orders across manufacturing continued to drop during May, to 40.6 PMI points, which is the lowest level for new orders since July 2011, according to the PMI.

Australian Industry Group Chief Executive, Innes Willox, said the difficulties facing Australian manufacturers intensified in May.

He also said non-mining trade exposed industries continued to feel the pressure of the two-speed economy.

“The RBA’s reduction in the cash rate early in the month and the slip in the dollar over recent weeks should have positive impacts over the next few months. Nevertheless, these factors were swamped in May by renewed household caution in the face of international and domestic uncertainties and weakness in residential and commercial construction,” said Willox.

“As well, the fundamental structural pressures facing non-mining trade exposed industries such as manufacturing continued to bite. It is critical that manufacturing policy measures being developed by the Government and the Opposition take into account both immediate pressures and the longer-term adjustment processes that are underway.”

PwC Partner – Economics and Policy, Jeremy Thorpe, said the PMI shows a clear tension between employment and wages in manufacturing.

“The employment sub-index is at its lowest level since August 2009, yet wages growth remains strong. Particularly in the context of the sustained falls in new orders, wages growth is an additional challenge to the competitiveness of the Australian manufacturing industry," Thorpe said.

Shadow industry minister, Sophie Mirabella, took the opportunity to blame the government's carbon tax for the drop in manufaturing activity.

“The implementation of Labor’s toxic carbon tax is only 30 days away and its effects on growth and investment are already being felt,” said Mirabella.

“The Prime Minister’s continual shrugging off of job losses, business closures and impending price hikes makes a mockery of the very real difficulties that Australian businesses and families are facing every day.

“The carbon tax will be the final straw for so many Australian businesses and families already struggling with exponentially rising costs of living.

“If this government was serious about maintaining a viable manufacturing sector in Australia then it would do the right thing and ditch this job-destroying carbon tax."

During the previous month, April 2012, the PMI showed a 5.6-point drop to 43.9; the strong Australian dollar, softer demand, import competition and the impending carbon tax were cited as factors affecting manufacturing growth.

The largest falls during April were reported in the basic metals, textiles and wood products, and furniture markets, with construction materials and paper, and printing and publishing experiencing a surprise increase during the month.