Manufacturing activity strengthens

Manufacturing activity in Australia strengthened in June, despite further rises in raw material costs and higher interest rates.

The Australian Industry Group - PricewaterhouseCoopers Australian Performance of Manufacturing Index (PMI) climbed 5.6 points to 54.5 points in June from 48.9 in May. An index above 50 indicates expansion in the sector while an index below 50 indicates contraction.

A lift in new orders, supplier deliveries and production underpinned the strengthening in activity, the survey showed. The June result was a welcome improvement after a difficult year for the industry.

The June Australian PMI constituted a better than expected year end, underpinned by further growth in consumer demand and early production for upcoming new passenger vehicles. The result was encouraging and seemed to shrug off factors such as higher fuel costs and interest rate pressures. Nevertheless, underlying conditions remain challenging, with further industry restructuring likely.

Seasonally adjusted, growth was reported in 10 of 12 sectors, up from seven in May. Growth was equally strong in construction material products and paper, printing and publishing, following falls in both areas in May.

Consumer-based sectors had generally continued to strengthen in June, but there was also evidence of an upturn in a range of industrial-based sectors. While these signs of stronger domestic demand are positive for the industry, domestic manufacturers still need to remain focused on becoming more competitive internationally, which means lifting capital intensity, stripping out unnecessary costs and continuing to invest in innovation. The continuing decline in employment and lean inventory levels suggests that manufacturers are moving in this direction.

Inventories increased only marginally while employment fell for the 12th consecutive month, although the rate of decline eased slightly.

Victoria and South Australia saw an upturn in activity, while conditions improved in NSW and rebounded in Queensland and Tasmania. Activity declined in Western Australia.