The pace of recovery in the manufacturing sector eased in March with declines in production, employment and inventories restricting growth.
The latest seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Australian Performance of Manufacturing Index (Australian PMI) fell 3.6 points to 50.2 in the month, just above the 50 point level separating expansion from contraction.
The employment sub-index was also down, dropping to 47.1, while wages grow rose slightly.
A drop in overall selling prices and slower growth in new orders also had an impact, particularly in the consumer-related sectors such as clothing and footwear.
A softening in construction materials demand contributed to the overall result for the month.
The lacklustre March Australian PMI reading suggests the recovery in manufacturing is battling strong headwinds in the form of weak demand, a strong dollar and rising interest rates. After taking into account higher margins above the cash rate, many businesses already face rates that are above 'normal' levels.
Australian Industry Group Chief Executive, Heather Ridout, said: "We don't want to call the manufacturing recovery a glass half empty, but we'd also be hesitant to call it half full.
"Notwithstanding the strong growth recorded in the December quarter National Accounts, the sector still has ground to make up before production levels are back to where they were in mid 2008.
"The Australian PMI result underlines the importance of the upcoming Federal Budget for manufacturing which faces particular challenges from the emerging two speed economy.
“It highlights the need for sustained Budget funding to help build competitiveness and capability to deal with the complex business environment, Mrs Ridout said.
This includes support for exports through the EMDG Scheme, support for small business through the Enterprise Connect program, support for business investment in innovation and R&D and support for skills investment by industry.
PricewaterhouseCoopers Global Head of Industry Manufacturing, Graeme Billings, said: "The easing of the rate of recovery is a warning to manufacturers that the sector will face an ongoing need to search for ways to lift productivity and performance over the period ahead. In this environment, successful businesses will be those that adapt and look for opportunities to innovate as well as maintaining firm control over business costs."