Australia | Mar 03 2009
By Andrew Nelson
Over the last six months both manufacturing in the US and the rest of the world has been hit simultaneously by tumbling demand and disappearing credit and liquidity. But while the overnight read of the ISM manufacturing index from the US has economists and investors believing that country’s manufacturing slowdown has now peaked, the same can’t be said for Australia.
The US ISM manufacturing index moved marginally higher to 35.8 in February, up from 35.6 in January and certainly better than market consensus for a read of 34. This makes it two months in a row that the index has advanced, albeit marginally. The prices paid index held steady at 29, meaning the disinflationary impact from the collapse in commodity prices is still in place, but has at least stopped accelerating.
Danske Bank senior analysts Signe Roed-Frederiksen and Peter Possing Andersen note the forward looking implications of the report were generally positive, given the production index improved further and new orders stabilised, while the inventory indices continued to decline. This was especially so for customer inventories, which dropped to 51. The two note this suggests the current inventory demand balance is beginning to become more favourable; the negative overshooting in manufacturing production might be close to reversal.
The supplier deliveries index, which is a gauge of underlying inflation pressures, also increased for the first time since September last year. The team explains this indicates the slack in the global product and labour markets is increasing at a slower pace. Nevertheless, the index continues to indicate an ongoing slowdown in the core inflation rate at the PPI and CPI goods levels.
These outcomes have Roed-Frederiksen and Andersen now believing that December marked the low point for the ISM in this cycle, with the past two months of improvement marking the first steps toward stabilisation in the manufacturing sector. The two predict in the coming months, the manufacturing industry will take back some of the negative overshooting that has gone on in recent months, which will see the ISM index push back up to 45-50 during late Q2.
However, Stephen Koukoulas, global strategist for TD Securities points out that the Australian manufacturing PMI, which was released yesterday, continued on its downward track, falling 4.9 points to just 31.7 points. This is the lowest level recorded in the short history of the series. He notes that in February there were falls in new orders, employment and wages, stocks, selling prices and deliveries. In fact, the only thing that rose was input prices, which is certainly not a positive.
Koukoulas explains the Australian PMI and US ISM are compiled on the same basis, so the momentum and level of the two series are comparable. The fact that the Australian manufacturing PMI is lower than the similar series in the US, the eurozone and China, while sitting a meagre 2 points above that of Japan, paints a very gloomy outlook for Australian manufacturing.
More importantly, says Koukoulas, it is very worrisome for the outlook of the Australian economy. At the least, these latest reads on US and Australian manufacturing indicate the Australian economy is just as fragile as the US, suggests Koukoulas. Sure, we haven’t witnessed the wholesale destruction of the domestic housing market or the same levels of weakened employment and Australian GDP growth still remains firmer, but Koukoulas thinks this is simply reflecting a lag between the US and Australia. With Australia,still being smashed by the collapse in commodity prices, he thinks there is a good chance Australia will eventually be weaker than the US, once the full effect of the global recession hits home.
So maybe the RBA pauses with its easing policy later today, but Koukoulas believes that you can rest assured it will be picking the scissors back up again in the next few months. He expects the cash rate to be cut to 2%, or even lower, by the middle of 2009 as the Australian recession catches up with the rest of the world.