A third straight month above 50 with the index at a five-month high gives the headline print a constructive look, but the underlying mix is softer than the number suggests, with output falling for a fifth consecutive month and new orders still contracting. The sharp easing in input and output price inflation from May is the more market-relevant signal, supporting the case that the worst of the oil-driven cost shock from the Middle East war may be behind manufacturers, provided the geopolitical situation doesn’t deteriorate again. Continued staff hiring and inventory building point to firms positioning for a recovery in demand rather than confidence in current conditions, which is worth flagging given the headline could otherwise be read as a stronger signal than the detail supports.
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Australia’s manufacturing PMI rose to 51.5 in June, a five-month high, even as output fell for a fifth straight month and price pressures eased sharply.
Summary:
- The S&P Global Australia Manufacturing PMI rose to 51.5 in June from 50.7 in May, its highest level since January and a third consecutive month above the 50.0 no-change mark, according to S&P Global
- Output fell for a fifth consecutive month, though the pace of decline was only marginal and new orders contracted at the weakest rate in their current four-month run of falls
- New export business returned to growth after two months of decline, helping offset weaker domestic new orders
- Input and output price inflation remained sharp but eased markedly from May, with firms citing ongoing fuel, freight and raw material cost pressures linked to the Middle East war
- Suppliers’ delivery times lengthened substantially again, with some suppliers reportedly consolidating deliveries to limit costs
- Firms built pre-production inventories at the fastest pace since last September and added staff for a second straight month
- Backlogs of work were depleted again, and business confidence for the year ahead hit a four-month high, though it remains below pre-war levels
Australian manufacturing activity improved modestly in June, with the S&P Global Australia Manufacturing PMI rising to 51.5 from 50.7 in May, its highest reading since January and the third straight month above the 50.0 threshold that separates expansion from contraction.
The headline improvement masked a more mixed picture underneath. Output fell for a fifth consecutive month, continuing a run of declines, though the pace of contraction was only marginal. New orders also fell again, with panellists pointing to client uncertainty and rising prices as constraints on demand. Even so, the fall in total new orders was the weakest in the current four-month sequence of contraction, helped by a return to growth in new export business after two months of decline.
Price pressures, which have been a defining feature of the sector since the outbreak of the Middle East war, eased sharply from May even as they remained elevated. Firms continued to report higher costs for fuel and freight, along with shortages of materials such as metals and plastics, all of which were passed through to customers via higher output charges. Andrew Harker, Economics Director at S&P Global Market Intelligence, said the slower rate of price increases in June was an encouraging sign for the months ahead, provided the geopolitical situation does not worsen again, noting that the conflict continued to weigh heavily on the sector through the month despite the memorandum of understanding signed between the US and Iran in June.
Supply chains remained under strain, with suppliers’ delivery times lengthening substantially again as some suppliers consolidated deliveries to manage costs. That encouraged manufacturers to build pre-production inventories at the fastest pace since last September, even as overall purchasing activity edged lower. Firms also added staff for a second consecutive month, citing both the replacement of departed workers and preparation for new projects, allowing backlogs of work to be depleted further. Business confidence for the year ahead climbed to a four-month high, though sentiment remains below levels seen before the war began, with firms’ optimism resting on hopes that new orders will return to growth as conditions stabilise.
This article was written by Eamonn Sheridan at investinglive.com.