August 2, 2023

Manufacturers report pandemic-era lows

Key findings

  • The Ai Group Australian Industry Index ® indicated contracting conditions in June, for the fifteen months since the start of the current interest rate rising cycle.
  • The Australian PMI® indicator fell to -25.6, indicating contractionary conditions in manufacturing not seen since the height of the pandemic.
  • The employment, industrial activity and new orders indicators all weakened into broader contraction.
  • Price indexes all rose mildly in July, reflective of lower but still persistent inflation. The average wages indicator surged by 14.0 points to its highest level, indicating ongoing wage pressures in the tight labour market.
  • Capacity utilisation fell marginally to 79.0%, reflecting slowing industrial conditions.

The Ai Group Australian Industry Index® fell in July 2023, losing 2.8 points to -14.7 points (seasonally adjusted). This indicates contractionary conditions. The index has been in contraction for the last fifteen months.

Industry activity

  • The activity/sales indicator slipped again after a modest recovery in June. It fell by 6.4 points to indicate broader contraction at -19.9.
  • Industrial activity has been negative for 13 consecutive months since July 2022.
  • The employment indicator fell very mildly in July and move further into contraction (-11.5). This is the lowest employment score since the height of the pandemic in July 2020.
  • Some survey respondents indicated the customers switched ordering low-cost goods from oversea competitors.

Leading indicators

  • New orders fell by 3.6 points to -19.4 in July, following a 7.4 point fall in June.
  • The new order trend has been in contraction for six of the last seven months.
  • Survey respondents across all subsectors report a very quiet ordering period, with the cost-of-living pressure and uncertainty of interest rate.
  • Input volumes improved but remain in mild contraction. The indicator has been neutral or negative since November 2021.
  • Business report that supply chains continue to be affected by ongoing shortages and delays.

Prices and wage

  • Despite inflation falling in Australia, pricing indicators remain elevated.
  • The input, sales and averages wages indicators all increased significantly in July.
  • The gap between the input and sales price indicator slightly wider again 39.5 points, suggesting an ongoing pricing squeeze on industry.
  • The average wages indicator rose 14.0 points in June, its highest monthly increase in a year. This reflects ongoing tightness in the Australian labour market.

Australian PMI® and PCI®

  • The Australian PMI® (all manufacturing) continued to contract in July.
  • This was the lowest score (-25.6) for the manufacturing indicator since the early months of the pandemic (May 2020).
  • The Australian PCI® (construction) followed the same path. It declined sharply by 19.8 points. and has returned to negative territory of -9.2.
  • Survey respondents indicate ongoing difficulties of recruiting suitable people for vacant positions, despite the slowdown in activity.

Upstream manufacturing

  • Upstream indicators moved in different directions in July, but all remain in contraction.
  • The chemicals industry rebounded significantly, rising 30.1 point to -11.2.
  • The decline in minerals & metals continued, falling 18.5 points. This marks the lowest score for minerals & metals manufacturers since Aii began in 2020.
  • July was a very weak ordering month for upstream firms who also reported staff turnover interrupting operations.
  • Upstream manufacturers experienced an increased input price pressure in overall operational cost which led to increased selling price.

Downstream manufacturing

  • Downstream manufactures were resilient and still in expansion despite a modest drop in July.
  • The machinery & equipment sector index dropped slightly to 2.9.
  • Food, beverage & TCF index fell by 3.9 points yet still able to retain its position in positive territory (+15.8).
  • Labour shortages remained acute for machinery manufacturers, while the higher logistics cost continued to affect the margin.
  • Food and beverage industry players reported a pessimistic retail sale, the effect of inflationary pressures and interest rate increases combined to reduce consumer demand.

Business-oriented services

  • Business-oriented services remained in contraction despite a slight rose 6.6 point in July.
  • This indicator includes utilities, technical services, and supply chain/transport providers.
  • The business services index has been volatile over the past three years, and has been on a downward trend from early 2022.
  • Services business reported a sharp decline in new orders due to uncertainty in the market and the increased cost pressure.
  • A lack of some skilled workers also limited the ability to complete ongoing initiatives.

Capacity utilisation

  • Capacity utilisation in Australian industry continued to dip slightly downwards to 79% in July.
  • This follows a record high in December/January -utilisation has ranged between 79-81% for most of 2022.
  • High-capacity utilisation continues to reflect supply-side constraints, particularly for labour supply.
  • Declining demand conditions reported since the new year have yet to translate into loosened capacity constraints.
  • With new orders contracting in recent month, it is likely that capacity utilisation will continue to fall back.

Source: Australian Industry Group
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