Manufacturing slowdown shows signs of stabilising

The decline in manufacturing activity continued to ease for the third consecutive month in July, with the seasonally adjusted Australian Industry Group - PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI) rising by 6.1 points to 44.5.

The decline in manufacturing activity continued to ease for the third consecutive month in July, with the seasonally adjusted Australian Industry Group – PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI) rising by 6.1 points to 44.5.

The index remains below the 50 point level separating expansion from contraction, but is at its highest level since September 2008.

Ai Group Chief Executive, Heather Ridout, said: “The easing in the rate of decline in manufacturing activity is encouraging. This is supported by the direction of the Global PMI, which stood at 46.9 in June 2009. In Europe, Japan and the US, declines in new orders and production have eased to levels last seen around the middle of last year.

“It is clear that the manufacturing performance in Australia has been deeply influenced by fiscal and monetary stimulus and inventory rundowns. Looking beyond the monthly figures, the big question is whether these improvements will be sustained once these stimulatory forces have abated,” Ridout said.

PricewaterhouseCoopers Global Leader of Industrial Manufacturing, Graeme Billings, said: “While the early signs of nascent recovery that have been emerging from recent Australian PMI results is encouraging, market conditions facing manufacturers will continue to squeeze profitability for some time.”

Billings agreed that the sustainability of such a recovery was the issue.

“July’s result, which shows ongoing declines in selling prices combined with a moderate pick-up in input and wages costs, provides clear evidence of this.

“Irrespective of the timing of an improvement in demand for their goods and services, companies will need to focus strongly on reining in unit costs, sustaining cash flows and, where possible, lifting productivity.

“An eye for the longer-term remains important, particularly if the recovery becomes entrenched.

“Issues such as the retention of skilled workers, focus on new products and services and building of cost effective supply chains will quickly resume importance as firms’ markets recover,” Billings said.

Key Findings for July:

· The seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Australian PMI stood at 44.5 in July. The PMI rose by 6.1 points, below the 50 point level separating expansion from contraction, but its highest level for ten months, or since September 2008.

· While uncertainty remains about its sustainability, the nascent improvement in manufacturing conditions is also becoming broader, with four of the twelve sub-sectors recording modest growth in activity and one remaining stable.

· While all components of the Australian PMI showed declines, the fall in new orders eased rapidly in July, and production and inventory falls eased significantly. The decline in manufacturing employment, which has persisted for 19 months, also softened slightly.

· A greater number, though still a minority, of respondents reported improved confidence and rising sales and orders. The oil & gas and infrastructure sectors are showing signs of improvement while in the mining and automotive related sectors, demand remains soft.

· Input cost and wages growth rose moderately, while selling prices fell for a fourth consecutive month.

· Manufacturing activity rose in Tasmania. The pace of decline eased in all other states except Queensland.