Australian PMI: Manufacturing contraction eases in May

The Australian PMI recovered by 5.8 points to 41.6 in May, after experiencing the largest single-month drop in the index’s history in April (readings below 50 points indicate contraction in activity, with lower results indicating a faster rate of contraction). The decline slowed across all activity indices in May, except for the exports index which recorded its lowest ever monthly result as many overseas markets essentially shut down. Many manufacturers reported that orders from their regular customers have been delayed or cancelled altogether because of the pandemic.

“While less of a fall than we saw in April, the further deterioration of manufacturing performance in May is deeply concerning,” said Ai Group Chief Executive Innes Willox. “From an already low base, manufacturing production and employment fell, and new orders dropped further. Other than the large food & beverages group which experienced a small gain, and the chemicals group which was broadly steady, all sectors of the manufacturing industry went further backwards in May. Manufactured exports suffered a particularly severe hit with the steepest fall in this index since 2004 when it was first compiled.

Five of the seven activity indices in the Australian PMI indicated a further contraction in May compared to April, albeit at an easing pace. Only the supplier deliveries index was broadly stable (up 11.5 points to 50.3), while manufacturing exports fell to the lowest level on record (down 11.5 points to 31.1) – lead times and higher prices for air freight impacted both importers and exporters, and many overseas markets essentially shut down.

Four of the six manufacturing sectors in the Australian PMI contracted and two were broadly stable in May. The food & beverages (down 1.5 points to 51.0) and chemicals (up 0.1 point to 49.7) sectors remained broadly stable, but the large food & beverages sector recorded its lowest result since 2014 as shopper stockpiling subsided. Despite deep contractions across all of the more traditional, heavy manufacturing sectors in May, those selling equipment to the agricultural sector reported ‘green shoots’ because of recent rain in some drought-affected regions.

The input prices index eased by 6.2 points to 65.4 in May, indicating slower price increases for manufacturing inputs. The selling prices index dropped 8.3 points to 42.4, indicating that manufacturers’ selling prices declined on average in May after rising in each of the previous three months.

The average wages index decreased by a further 3.9 points to 45.6 points, indicating few (if any) manufacturers were able to increase employees’ average wages in May. This was the lowest monthly result in the history of this series (since September 2007) and only the third time it has fallen below 50 points. This fall might not reflect compensating wage payments for employees with access to the JobKeeper income support scheme.

“The industry is hoping the fiscal and monetary support that has been provided to the economy, together with the gradual lifting of restrictions that are inhibiting production and consumption alike, limit the extent of further deterioration and hasten the beginnings of a recovery,” Willox added. “In the meantime, we are steadying ourselves for further losses as indicated by the low level of new orders received by manufacturing businesses. Action to accelerate the easing of restrictions is particularly important given the success in constraining the spread of COVID-19. The removal of interstate barriers to the movement of goods and people is clearly overdue.”