Manufacturing activity at three-year low

Australian manufacturing activity has hit a near three-year low as high interest rates slow the economy, a report shows.

The Australian Industry Group/PricewaterhouseCoopers performance of manufacturing index (PMI) fell 0.1 index points to 46.9 in July.

The reading was below the 50-point level, which separates an expansion from a contraction, for the second straight month.

It was also the weakest reading for the survey of about 200 companies since November 2005, when the PMI was 43.7.

Australian Industry Group chief executive Heather Ridout said the feebleness in manufacturing was not surprising considering the tighter financial conditions.

"The economy, more generally, is feeling the ongoing impacts of the Reserve Bank's tightening of monetary policy as well as market-based rate rises," she said.

"Inventories were run down significantly, suggesting continuing weaker demand and the potential for further falls in production."

The fall in housing construction, higher raw costs for steel, aluminium and fuel, staff retainment difficulties and the Western Australia gas disruption all have had negative impacts on activity.