The strong Australian dollar, increased raw material costs and weaker demand contributed to a dip in the manufacturing sector in September.
The Australian Industry Group – PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI) fell 4.4 points to 47.3 to be below the critical 50 point level for the first time this year (readings below 50 indicate a contraction in activity).
The weak result was largely due to deepening declines in activity in the food and beverages and fabricated metals sub-sectors and sharp reversals in the previously expanding clothing and footwear and construction materials sub-sectors.
Across manufacturing, production levels fell into the red for the first time in six months. However, manufacturers in the miscellaneous manufacturing and transport equipment sub-sectors remained in positive territory due to a lift in production and new orders.
Australian Industry Group Chief Executive, Heather Ridout, said: "The contraction in manufacturing activity in September comes after a six-month period of falling growth rates and a steady build-up of inventories.
“The strength of the Australian dollar in particular, led by the large rises in minerals prices, is challenging the competitive position of the sector in both the domestic and export markets, Ms Ridout said.
"Manufacturers are facing growing pressures on two other fronts – private sector demand is still not growing sufficiently to offset the unwinding of fiscal stimulus measures while wage pressures have built up steadily and are now at a level not seen for several years.
“This combination of factors underlines the vulnerability of manufacturers to interest rate rises and points to the importance of productivity-boosting policy measures including in the areas of innovation, education and training, taxation and workplace relations."
PricewaterhouseCoopers Global Head of Industrial Manufacturing Graeme Billings said: "As suggested by the drop in activity in consumer goods sectors such as food and beverages, textiles and clothing and footwear, household spending remained tentative in September in the face of ongoing political uncertainty and expectations of higher interest rates. The weakness in housing approvals has seen a fall in output of construction materials and a rise in inventories. These circumstances, together with the strength of the dollar, present substantial challenges for manufacturers who must continue to search for business efficiencies and innovation opportunities," Mr Billings said.