Australian PMI: Manufacturing contracts in September

Victorian manufacturers continue to report the weakest results among the larger manufacturing states with the Victorian PMI falling further into contraction – down 6.4 points to 37.6  (readings above 50 points indicate expansion in activity, with higher results indicating a faster rate of expansion). NSW (down 6.7 points to 44.3) and Queensland (down 3.8 points to 43.3) also reported a decline in activity while South Australia rose further into expansion (up 2.1 points to 67.4), given its manufacturing sector’s greater number of clients related to agriculture.

“The disappointing contraction of manufacturing and the slump in manufacturing employment in September is a timely reminder that recovery from the COVID-19 crisis, at least in its initial stages, will be tentative and prone to periodic setbacks,” said Ai Group Chief Executive Innes Willox. “Manufacturing activity was demonstrably dragged down by the Melbourne lockdown and associated restrictions in other parts of Victoria as well as the tougher border barriers put in place in response to the Melbourne outbreak.”

Six of the seven activity indices in the Australian PMI were in contraction in September, with only production broadly stable (down 3.3 points to 50.1). The employment index fell by 2.5 points to 47.7, indicating another mild fall in manufacturing employment, while new orders fell again (down 1.5 points to 45.1), suggesting another period of softer production and sales in the months ahead.

Two of the six manufacturing sectors in the Australian PMI expanded and three contracted in September (according to trend data). The large food & beverages (down 0.3 points to 57.7) and machinery & equipment (up 0.7 points to 53.8) manufacturing sectors expanded while contraction was evident in the more traditional ‘heavy industrial’ manufacturing sectors, due to very low demand and few new orders coming in from Victoria. The textile clothing & footwear, paper & printing sector was broadly stable (up 2.0 points to 50.5).

The input prices index fell again in September (down 1.4 points to 57.9), indicating slower cost increases for manufacturing inputs, while selling prices were broadly stable (up 3.1 points to 49.3) for the first time since April after declining in recent months. The average wages index improved by 1.5 points to 52.3, indicating rising wages in September after a rare series of declines in recent months due to COVID-19.

“Other factors also contributed to the weakness in September,” Willox added. “The construction sector in general and residential building in particular is contracting in the face of cyclical and structural forces and this is impacting heavily on demand for manufactured building materials; exports which fell in September, are vulnerable to disruptions in demand in other countries; and the continuing slump in business and household confidence is holding back spending and demand for a wide variety of manufactured goods – as reflected in the fall in new orders in September.

“There is clearly a need for further fiscal stimulus in next week’s federal Budget to help rebuild the confidence that is needed to get businesses investing and households spending.”