Manufacturing sees strength in uncertain environment

Australian manufacturing could be at the start of a positive trend, according to new data, a Commonwealth Bank economist says.

Speaking in late October, CBA Energy and Sustainable Economist John Oh told a group of manufacturers that recent Purchasing Managers’ Index (PMI) surveys, produced by S&P Global Ratings, were indicating an encouraging trend among manufacturers.

With any number over 50 indicating positive sentiment, the Manufacturing PMI hit 53.0 in August and was at 51.6 in November – indicating that conditions in the manufacturing sector are improving.

Oh says this upward trend coincides with a rise in new orders for both domestic and export markets, along with rising job vacancies and an increase in manufacturing capital expenditure, specifically in buildings and structures.

“A combination of all that data points to the idea that we may be at the beginning of a pickup cycle in manufacturing,” he says.

“Now it is just an indicator, but what this data suggests is that perhaps likely that Australian manufacturing is actually doing well in this uncertain environment.”

Australia’s own economy has picked up – recovering to pre-pandemic levels, Oh says.

“As labour markets have improved, as real household disposable income has improved … and with rising house prices that have improved the wealth of some consumers, we have seen consumption bounce back, and we’re likely to see the consumer drive this growth until 2026.”

Oh says he expects to see broader economic growth in Australia in the second half of 2026, following a period of cuts to interest rates in both Australia and the USA in a bid to moderate inflation.

He adds the situation is evolving in China, after its economy expanded by 5.3% in the first half of 2025 following a concerted push to support industrial activity and expand exports.

Despite falling domestic construction activity and negative steel margins, “Chinese steel product exports… [have] been increasing at pretty rapid rates. It’s been above 10 million tons a month. The last time we were at this point was in 2015,” he says.

For Australian manufacturers, this means access to cheap steel imports from China are likely to continue to remain until 2026, Oh says.

These changes come among a period of transition within energy systems – where power systems that once were entirely driven by coal and gas are now using power generated through solar, wind, hydro and other sources, among others.

“We have seen fossil fuel generation come down and be replaced by renewables. Last financial year, around 41 per cent in the east coast was met by renewable energy,” Oh says.

But the shift isn’t without its pains: “We have seen emissions intensity fall. But when we look at other measures like electricity price and reliability, those outcomes have actually worsened. And what this really shows is how complex this energy transition is… for a successful consensus approach to the energy transition, we need all three.”

Oh emphasises the need for vigilance around changes in the energy system and attention to structural trends, noting that a demand surge from data centres is poised to further strain the electricity market.

While affordable access to gas on Australia’s east coast is providing a welcome safety net during this time of transition, Oh says supply from Victoria’s Gippsland Basin is dwindling, with shortfalls expected in 2028-29, though he adds that new discoveries continue to be made.

While Oh notes the Australian Energy Market Operator has stated that risks are balanced for the next three years, he says there are a series of variables at play, with the retirement of old power stations and the construction of new generation storage projects.

“Hand to heart, it’s very difficult to see stability in the next five years, just given that it’s contingent on so many things going as planned – construction, generation, projects, storage projects, transmission lines… That’s our outlook.”

One proposal to help avoid shortfalls is to establish an LNG import terminal at Port Kembla, which Oh says will likely push the anticipated shortfall out from 2028 to 2034 – but noted that this would have implications in terms of pricing.

“I would see this as an opportunity to see whether those that have high exposure to gas will consider perhaps hedging products with your energy provider… it’s really worthwhile, considering the fact that gas prices have a really powerful role in setting the price of electricity,” he says.