Australian PMI: Manufacturing makes promising start to new financial year

Six of the seven activity indices in the Australian PMI indicated expansion in July, with only the exports index contracting, down 5.8 points to 41.4 (readings above 50 points indicate expansion in activity, with higher results indicating a faster rate of expansion). Expansion in new orders slowed (down 3.0 points to 52.7), with all other activity indices expanding at a faster rate than in June. Four of the six manufacturing sectors in the Australian PMI contracted in July (according to trend data), with only the large food & beverage (up 1.9 points to 59.4) and machinery & equipment (up 3.2 points to 54.3) sectors indicating expanding conditions.

“With the encouraging lift in July, Australian manufacturing has expanded for two consecutive months for the first time since October 2019,” said Ai Group Chief Executive Innes Willox. “Despite the improvement, weak spots persist. July’s expansion was driven by the two largest manufacturing sectors: the food & beverage and machinery & equipment sectors. All other sectors are reporting difficult trading conditions due to the impact of COVID-19 and the underlying weakness of residential construction.”

Input costs rose in July (up 3.3 points to 63.5) but remain below the long-term average (67.5 points since 2003). The selling prices index remained unchanged at 48.9 points, indicating that manufacturers’ selling prices declined at the same rate as in June. The average wages index eased by 1.0 point to 48.8, indicating falling average wages across the manufacturing sector. The seasonal bump in the index that usually occurs in July with the annual minimum wage decision will now likely occur in November when this year’s 1.75% increase for 2020-21 becomes operative across manufacturing awards.

“Manufacturing employment, production and new orders were all higher than in June although the pace of improvement in new orders slowed over the month,” Willox added. “The performance of the sector was in part due to stimulus measures including JobKeeper and the extension of the instant asset write-off arrangements which boosted sales and orders in the machinery & equipment sector. Against the positive signs from the manufacturing sector, the winding down of stimulus from September, the impact of the Melbourne lockdown and the severity of the outbreak, as well as tougher border restrictions are likely to weigh on the sector in coming months.”