Australia | Nov 16 2011
– Oz manufacturing activity falls in September
– NAB Manufacturing Activity Index down sharply for the period
– Decline due primarily to lower business confidence and higher purchase costs
By Chris Shaw
National Australia Bank's Manufacturing Activity Index fell sharply in the third quarter of 2011, the decline primarily driven by a dive in business confidence and an increase in purchase costs.
For NAB chief economist Alan Oster the fall implies negative performance in the manufacturing sector, as businesses are dealing with the challenges of a strong dollar, higher costs and weak domestic consumption.
The Manufacturing Index, which replicates movements in activity in the manufacturing sector, fell to minus 0.9 points in the September quarter. This compares to relatively neutral readings over the previous nine months, the fall consistent with falls in manufacturing GVA (gross value added) during the period.
Oster notes business confidence in the manufacturing sector also fell sharply in the September quarter, so contributing the most to the downturn in the index. While confidence is falling purchase costs for manufacturers also continue to trend steadily higher, with the Chemical and metal products sectors among those most affected since the start of the year.
In terms of price growth, Oster notes recent trends are less encouraging as the sector experienced a sharp fall in the quarter to a zero reading. This is expected to impact on the Activity Index in coming quarters.
On the plus side Oster notes wage pressures for manufacturers have eased marginally over the past two quarters, though these remain at high levels relative to the post-GFC period.
The index results showed the disparity between individual sub-sectors narrowed a little in the September quarter, with activity indices for all sectors apart from Textiles, Clothing and Footwear sector deteriorating.
The largest declines in the period were experienced in the Printing and Non-metallic minerals sectors, both falling by more than one point. Similar falls were recorded by the Wood and Paper and Metal Products sectors. This compared to declines of less than one point for the Manufacturing, Food, Beverage and Tobacco and Machinery and Equipment sectors.
Running through the sectors, Oster notes the drift lower for the Food and Beverage sector was mainly due to higher purchase costs. This reflects the impact of currently high global food prices. Higher purchase costs also drove the Chemicals activity index lower.
Falling business confidence and growth in final prices were seen as the major factors driving the downturn in the Printing and Publishing sector, while mixed trends allowed the Textiles, Clothing and Footwear sector to deliver a relatively stable result.
Weaker business confidence was the major reason for the decline in the Wood Product sector in Oster's view, with allegations of dumping structural timber products into the Australian market a particular concern at the present time.
The Machinery and Equipment sector was also impacted by falling business confidence and a pull back in final price growth, while Oster suggests the Metal Product index continues to come under pressure from both lower confidence and higher purchase costs for raw materials.
Weaker demand was seen as a major factor leading to a fall in the Non-metallic minerals sector, while confidence fell from the third strongest sector in June to the second weakest in the quarter. Oster notes the stronger dollar has increased the level of competition in products not traditionally imported, which is adding to the pressures being faced by manufacturers in the sector.
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