The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®) edged up 0.8 points to 51.8 points in June, taking the index into more expansionary territory (results above 50 points indicate expansion). The June result comes after mildly expansionary conditions in May and marks a complete twelve months of continuous expansion, the equal longest expansion over the last decade.
The continued expansion in the Australian PMI® is linked to the fall of the exchange rate over recent years (despite some periods of trengthening). With the Australian dollar now considerably lower than its peak of nearly five years ago, manufacturers have regained some of the competiveness that was given up during that period of high exchange rates.
Five of the seven manufacturing activity sub-indexes in the Australian PMI® remained above 50 points in June. Encouragingly, production (54.4 points), new orders (54.1 points) and sales (53.7 points) drove the expansion for the month and this bodes well for future months. The employment sub-index remained in contraction (47.9 points) and deliveries slipped into mild contraction (48.9 points) for the month.
Six of the eight manufacturing sub-sectors in the Australian PMI® expanded in June (three month moving averages). The strongest sub-sectors were petroleum & chemical products (62.1 points), non-metallic mineral products (58.3 points) and wood & paper products (57.7 points). The food & beverage sub-sector lost some steam in the month (down 11.6 points to 53.7 points) but kept expanding. Metal products (50.5 points) and printing & recorded media (50.2 points) lifted out of contraction. The textiles & clothing products (48.9 points) and machinery & equipment (44.8 points) sub-sectors both contracted for the month.
Comments from manufacturers in June indicate continuing uncertainty surrounding the impending Federal Election. Higher exports and import replacements are lifting activity, assisted by the lower Australian dollar, but strong competition from overseas businesses is curbing growth and putting pressure on selling prices. Some weak spots in the economy and a lack of capital expenditure are weighing on activity.
Good news. Although the ongoing contraction in employment and the weaker reading on wages (see next chart) is a concern.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
