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Resilience in Australia's Manufacturing Sector Raises Concerns Over Price Pressures

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Clarence L. Polk

• August 31, 2023

According to Judo Bank, Australia's manufacturing sector is showing signs of resilience, following a slow start to the year. However, there are growing concerns about price pressures that could raise alarm bells for the Reserve Bank of Australia.

The Judo Bank Australian manufacturing purchasing managers' index remained unchanged at 49.6 in August, compared to July, which indicates that the sector is still performing strongly, similar to the levels seen in February.

Warren Hogan, chief economic adviser at Judo Bank, highlights that the indexes for manufacturing output and new orders have been steadily increasing over the past three months. Although just below the threshold of 50, these indicators suggest positive momentum in the sector.

Despite the earlier slowdown in activity this year, the demand for staff in manufacturing has remained strong. The employment index has consistently stayed above 50 throughout 2023 and is now expanding further, indicating a positive outlook.

Hogan believes that an economy that continues to generate jobs is unlikely to experience a major slowdown. Therefore, he sees little chance of a broader recession in the economy over the next six months.

However, manufacturers have reported rising cost pressures over the past few months, despite the normalization of global supply chains and the easing of commodity prices. Factors such as a weak Australian dollar and increasing global oil prices may contribute to this phenomenon. Additionally, domestic energy costs and labor costs are on the rise, especially for small and medium-sized enterprises. The recent 5.75% increase in the country's minimum wage on July 1 could also be a contributing factor.

As a result of these cost pressures, final prices have seen an increase as well. The index for final prices climbed by 1.5 points to reach 53.6, its highest reading since May. This indicates persistent inflationary pressures that may concern the Reserve Bank of Australia.

Overall, while the manufacturing sector in Australia is showing resilience, the mounting price pressures are raising apprehension. These developments will be closely monitored by the Reserve Bank of Australia as they evaluate the need for any potential response.