Australian PMI: Manufacturing contracts amid weakest conditions in three years

In falling to 48.1, the Australian PMI slipped below the 50-point threshold separating expansion from contraction for only the third month since July 2015 (readings below 50 points indicate contraction in activity, with the distance from 50 indicating the strength of the contraction). An increasing pace of contraction in new orders suggested a weak Christmas period may be ahead for Australian manufacturers.

The weaker manufacturing sector in November was driven by contraction in employment and new orders and sales and production were barely steady. The overall weakness was not evident in the large food & beverages sector, which reported a further strengthening of performance. Both the machinery & equipment and the chemicals sectors also continued to expand in November, with weakness concentrated in the metal products, building products and TCF & printing groups.

“A decline in performance across the diverse manufacturing sector had been telegraphed by the weakness in new orders in recent months,” said Ai Group Chief Executive Innes Willox. “The further fall in new orders in November is far from encouraging and is further evidence that the stimulus from interest rate reductions and the income tax cuts has not so far flowed through to consumer and business spending. The Federal Government will need to look very closely at additional stimulus options over coming months.”

Three of the six manufacturing sectors in the Australian PMI expanded in November (according to trend data), led once again by food & beverages (up 0.4 points to 60.8) and machinery & equipment (down 0.3 points to 53.1). Although still contracting, the metal products sector’s rate of contraction continued to slow (up 1.7 points to 46.8), with businesses servicing mining and defence projects reporting solid market conditions.

The recent weakness in new orders continued in November (down 1.1 points to 47.2) and has now started to flow through to other activity indices, with employment (down 5.5 points to 47.3) and supplier deliveries (down 7.0 points to 45.3) also contracting. Production (down 5.8 points to 49.7), sales (down 2.9 points to 49.2) and exports (down 2.0 points to 49.8) all weakened to a position of stability, with finished stocks the only index to remain in expansion (up 4.2 points to 52.6).

The input prices index made a welcome drop from November’s 2019 high (down 10.7 points to 64.0), while selling prices jumped back into positive territory (up 6.2 points to 51.2). The average wages index fell a further 2.5 points to 56.8 in November, indicating wages rose at a slower rate than in October. Drought remains a top concern for many manufacturers, particularly those located in rural areas or those selling metal products and machinery & equipment to the agricultural sector.