Manufacturing activity contracted for the first time in five months in December as the sector felt the pressure of a high Australian dollar, successive interest rate rises and a weak global economy, a survey shows.
The Australian Performance of Manufacturing Index (PMI) slipped by an adjusted 2.8 points in December to 48.5, after a drop off in production, new orders and input deliveries.
The index was below the 50-point level that separates expansion from contraction for the first time since July 2009.
Ai Group chief executive Heather Ridout described the fall in manufacturing as mild but said it confirmed economic recovery was patchy.
"The improvement in new orders which had driven stronger production has tailed off," she said.
"Those sectors which have benefited from economic policy stimulus, largely the consumer and construction related sectors, are continuing to grow.
"Overall though, the weak world economy, a still modest improvement in the domestic market and the Australian dollar still at high levels are still dampening the sector."
The Australian Industry Group - PricewaterhouseCoopers survey found the production sub-index fell by 7.4 points, seasonally adjusted, to 46.6, indicating the first fall in production in five months.
The new orders sub-index fell by a seasonally adjusted 3.3 points, to 48.6, indicating a mild fall in the level of new orders.
"The new orders index has remained volatile over recent months indicating ongoing caution among buyers of manufactures," according to the survey.
The textile, clothing and footwear and transport equipment sectors recorded significant rises in activity in December.
"These sectors appear to have benefited from the economic stimulus flowing from low interest rates and expansionary fiscal policy," the survey said.
Meanwhile, activity fell in the paper, printing and publishing, and food and beverage sectors.
"Manufacturers facing the long-term pressures of a higher Australian dollar and competition from lower cost economies are continuing to face a squeeze on manufacturing profitability which shows no signs of abating," said PricewaterhouseCoopers global head of Industrial Manufacturing, Graeme Billings.
"The weakness in manufacturers' markets here and overseas is keeping pressure on pricing while input prices and wages costs continue to grow.
"The key to successfully navigating these difficult conditions is a strong focus on cost and cash flow management."