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May 1, 2013 12:17 pm
Conditions in Australia’s manufacturing sector worsened in April, with a key gauge of activity hitting its lowest level since 2009 as exporters continued to struggle with the strength of the domestic currency.
The Australian Industry Group’s performance of manufacturing index (PMI) dropped 7.7 points to a four-year low of 36.7 points in April, led by a drop in exports. A reading below 50 indicates a contraction in activity.
The larger-than-expected decline highlights the challenges facing policy makers as they attempt to engineer a rebalancing of the Australian economy over the next year.
The Reserve Bank of Australia is looking to non-mining business investment as well as house building to pick up the slack and maintain growth as the country’s resource investment boom peaks in the coming quarters, at about 8 per cent of GDP.
In an attempt to spur investment and offset the impact of the strong Australian dollar on trade-exposed industries such as manufacturing, the RBA has lowered its benchmark cash rate by 125 basis points over the past year to 3 per cent, equalling the record low.
While conditions in the housing market have improved, with prices rising since the middle of last year, businesses are reluctant to invest in expansion and new equipment.
Innes Willox, AIG chief executive, said the sharp declines in manufacturing production, employment and new orders seen in April, along with the continued erosion of exports, was deeply concerning.
“The strength of the Australian dollar is a major burden on domestic producers and our rising labour costs and high energy prices are adding to the pressure,” he said.
“Together they are undermining competitiveness in both local and exports markets and are proving a major barrier to inbound investments in domestic manufacturing facilities with Australia now ranking among the highest cost manufacturing centres internationally.”
General Motors blamed the strength of the Australian dollar, which recently hit a 28-year high on trade-weighted basis, for a decision to cut 500 jobs last month in Australia.
The strength of the Australian dollar is a major burden on domestic producers and our rising labour costs and high energy prices are adding to the pressure
- Innes Willox, chief executive, AIG
Although manufacturing accounts for a small share of the Australian economy – a little more than 7 per cent of GDP and 8 per cent of total employment – economists said the weaker figures seen in April were likely to be reflected in other trade-exposed industries.
“The slump in the AIG survey follows deterioration in other private sector business surveys,” noted Andrew Hanlan, senior economist at Westpac in Sydney. “Each survey suggests that current economic conditions are sub trend.”
But few forecasters expect the RBA to reduce its benchmark rate when its Reserve Bank Board meets next week. This is because senior officials believe low rates are already having some effect in pockets of the economy such as housing.
However, the RBA, which has not lowered rates this year, has said the outlook for inflation gives it “scope to ease further” should that be necessary to support demand.
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