Australian factory input costs hit four-year high as Middle East supply disruption bites

Australia April manufacturing PMI 51.3 vs 49.8 in March, but headline flatters. Input costs fastest in 4 years, supply delays worst since July 2022. Output, new orders and employment all fell. Middle East war cited.

Summary:

• The S&P Global Australia Manufacturing PMI rose to 51.3 in April from 49.8 in March, moving back above the 50.0 no-change mark, but the headline reading was driven by supply chain disruption and inventory building rather than genuine demand improvement
• Suppliers’ delivery times lengthened to the largest degree since July 2022, and because longer delivery times are inverted in the PMI calculation, this mechanically inflated the headline index
• Input cost inflation accelerated to its fastest pace in over four years, with nearly 69% of respondents reporting a rise in input costs during the month; higher fuel prices were identified as the principal driver
• Output price inflation also surged, reaching among the fastest rates in the survey’s decade-long history, pointing to significant pass-through pressure building in the manufacturing supply chain
• New orders continued to fall, with new export business declining for the first time in four months; output fell for the third consecutive month, with the latest reduction the fastest in 16 months
• Employment was scaled back for the second consecutive month as firms responded to lower order books through non-replacement of leavers and reduced working hours
• Despite lower output requirements, manufacturers increased purchasing activity and built stocks of inputs for the first time in seven months, with anecdotal evidence pointing to deliberate safety stock accumulation ahead of anticipated further price rises and supply delays
• Business confidence fell for a third straight month to its lowest since July 2024, with the Middle East conflict, associated inflation and cost-of-living pressures cited as key concerns
• Some residual optimism remained in the year-ahead outlook, with manufacturers expressing hope that an end to the conflict would bring improved demand and operating conditions

Australia’s manufacturing sector posted a PMI reading above 50 in April for the first time since February, but the headline figure offers little genuine comfort. The index rose to 51.3 from 49.8 in March, but the improvement was almost entirely a function of supply chain disruption and defensive inventory building rather than any recovery in underlying demand. Stripped of those distortions, the picture is one of a sector under sustained and intensifying pressure from the Middle East conflict.

The mechanics of the PMI calculation mean that longer supplier delivery times, which are inverted in the index, add to the headline reading in the same way that improving demand would. In April, delivery times lengthened to the greatest degree since July 2022, driven by disruption to international freight and acute difficulties sourcing fuel. That single factor did more to lift the PMI above 50 than any genuine improvement in business conditions.

The three sub-indices that more directly reflect economic activity, new orders, output and employment, all remained in contraction. Output fell for a third consecutive month and at its fastest rate in 16 months. New orders continued to decline, with export business falling for the first time in four months as overseas demand softened. Employment was cut for the second month running as firms responded to lower workloads through reduced hours and the non-replacement of departing staff.

The inflation data is where the report becomes most significant for the broader economic outlook. Input cost inflation accelerated to its fastest pace in over four years in April, with nearly 69% of surveyed manufacturers reporting higher costs during the month. Fuel was the dominant driver, a direct consequence of the energy price shock emanating from the Middle East conflict. Output price inflation also surged, reaching among the highest rates recorded in the survey’s decade-long history, suggesting manufacturers are passing costs through at an aggressive pace.

Against that backdrop, manufacturers took the unusual step of building stocks of inputs despite falling output requirements, with purchasing activity rising and input inventories increasing for the first time in seven months. The rationale was explicitly defensive: securing materials ahead of anticipated further price rises and supply delays rather than any expectation of improved orders.

Business confidence fell for a third consecutive month to its lowest since July 2024. The Middle East conflict, the inflation it is generating and broader cost-of-living pressures were repeatedly cited as concerns. Some optimism about the year ahead persisted, conditional on a resolution to the conflict, but for now operating conditions are worsening with each passing month.

—

The headline PMI number is misleading and markets should look through it. A reading of 51.3 driven almost entirely by supply chain delays and safety stock building is not a signal of improving demand conditions; it is a distress signal dressed up in expansionary clothing. The three sub-indices that matter most for genuine economic activity, new orders, output and employment, were all in contraction.

The input cost inflation reading at a four-year high, with output price inflation among the fastest in the survey’s decade-long history, is the number that will concern the Reserve Bank of Australia. If these price pressures persist and feed through to the broader economy, the case for rate cuts weakens further. Business confidence falling for a third consecutive month to its lowest since July 2024 underscores the fragility of the outlook.

This article was written by Eamonn Sheridan at investinglive.com.