The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) fell 3.3 points to 49.4 in June, signalling the first mild contraction in manufacturing conditions and the lowest result since August 2016.

The mild contraction in the Australian PMI in June (down 3.3 points to 49.4) brings to an end 33 consecutive months of stable or positive results (50 points or higher, with the distance from 50 indicating the strength of the decrease) since August 2016. Of the seven activity indexes in the Australian PMI, only production (up 0.7 points to 51.9) and exports (up 2.8 points to 53.1) remained in expansion in June. The employment (down 5.5 points to 50.1), new orders (down 2.5 points to 49.8) and sales (down 0.8 points to 50.8) indices were broadly stable, while supplier deliveries (down 6.5 points to 47.1) and finished stocks (down 6.8 points to 44.0) contracted – possibly due to end-of-financial-year stock clearances.

“Australia’s manufacturers reported the weakest conditions in almost three years in June,” said Ai Group Chief Executive Innes Willox. “While the pace of growth has eased over the past year, the combination of the housing construction downturn, a slowing in engineering construction, continuing drought conditions and slow income growth across the broader economy caught up with the manufacturing sector and dragged it into negative territory as the financial year drew to a close.”

Three of the six manufacturing sectors expanded in June (according to trend data), led once again by food & beverages (down 0.4 points to 60.6) and building materials, wood & furniture (up 1.2 points to 62.0). The metals products sector fell deeper into contraction (down 1.7 points to 40.8), as did the small but diverse textiles, clothing, footwear, paper & printing products sector (down 3.2 points to 44.1).

The input prices index remained elevated in June, easing slightly by 0.9 points to 67.4, with machinery & equipment manufacturers in particular reporting increasing costs for high-value imported components due to the low Australian dollar. The selling prices index fell 2.8 points to 49.6 in June, indicating broadly stable or marginally falling selling prices; it is the first contraction since December 2018.

The average wages index rebounded by 4.2 points to 59.7 in June, indicating a faster rate of wage increases across the manufacturing sector. This comes ahead of the 1 July 3.0% minimum wage rise, with the ABS estimating 21% of manufacturing employees have their wages set only by Awards (which are linked to the minimum wage).

“While production edged ahead in June, both employment and new orders were flat at best and pressure on margins intensified as sell prices eased and input costs and wages continued to rise,” Willox added. “Manufacturers will be hoping that the combination of lower interest rates and personal income tax cuts translate into higher domestic demand over coming months. This reinforces arguments in support of the additional tax measures introduced in the last Federal Budget.”