Confidence dampened following Federal Budget despite a rise in production, reports Team IFM
Sydney, June 9: May witnessed a contraction in Australia’s manufacturing industry for the seventh consecutive month, an independent survey report has found, the latest shrinkage primarily reflecting the budget blues in the business sector.
The latest Australian Industry Group (AIG) Manufacturing Index or the PMI moved up by 4.4 points to 49.2 points in May after being seasonally adjusted, AIG said in a statement. Readings below 50 points indicate contraction in the sector under review.
Respondents noted a dampening in confidence following the Federal Budget, although there was a rise in manufacturing production and new orders in the month. These sub-indexes improved to 51.6 points and 55.1 points respectively, reflecting expansion.
However, manufacturing employment contracted further in May, as did supplier deliveries, inventories and exports. Four sub-sectors expanded and four contracted in the month, AIG said.
An AIG survey earlier this year indicated that Australia’s CEOs expected business conditions in 2014 to be “modestly better” than that experienced in 2013, and listed weak demand across the economy as the main concern for growth, according to AIG Chief Executive Innes Willox.
Willox again mentioned weak demand in his summation of the May performance analysis. “The manufacturing sector continues to be buffeted by weak household demand, a lack of business confidence and fierce competition in both domestic and export markets heightened by the renewed strength in the Australian dollar,” he analysed.
“The ongoing uncertainty over a number of budget measures is adding another layer of concern for local manufacturers,” Willox added.
BUDGET DAMPNER
The AIG report for May manufacturing output said many respondents “continued to cite challenging business conditions” in the sector. “The Federal Budget has reportedly dampened confidence levels and has delayed or lowered business commitment to new expenditure,” it said.
Along with it, the renewed strength in the Australian dollar has seen import competition intensify once again this year, it added.
The good news for the month: both the production and new orders sub-indexes of the PMI rose above 50 points into expansion territory. The sales sub-index also expanded following six months of contraction.
The bad news: manufacturing employment contracted at a faster pace in May, while the supplier deliveries and stocks sub-indexes both pointed towards contraction this month. Conditions were also subdued in the manufacturing export market.
The report said that across the manufacturing sub-sectors, four expanded and four contracted in May. Expanding were the sub-sectors of petroleum, coal, chemicals and rubber products (51.2 points), non-metallic minerals (50.9), and smaller wood and paper products (55. points), while the fourth – textile, clothing and other goods – expanded for the first time since September 2012 (52.6).
In contrast, the very large food and beverages sub-sector contracted for the first time since February 2013 (49.3 points). The large metal products and machinery and equipment sub-sectors also continued to contract in May.
“While there was an encouraging rebound in new orders after a particularly weak April, the public reaction to the Federal Budget appears to be weighing negatively on consumer sentiment and business confidence,” said Willox.
CEO EXPECTATIONS
An earlier AIG survey report of Australia’s CEOs showed that in general, they expected 2014 business conditions to be “only modestly better” than in 2013; while about 35 percent predicted conditions would deteriorate, 37 percent anticipated an improvement.
The remaining 28 percent of CEOs expected conditions to be unchanged over the coming year. “Although more than a third of businesses expect a deterioration in 2014, this is an improvement on CEOs’ expectations a year earlier,” AIG said.
At the end of 2012 in contrast, just over half of all CEOs surveyed (52 percent) had expected general business conditions to deteriorate in 2013 and around a third expect no change.
“Just 16 percent of CEOs had expected conditions to improve in 2013, compared to a much healthier 37 percent expecting an improvement in 2014,” AIG added.
Across the major sectors included in this survey, deteriorating conditions are expected in 2014 by almost half of mining services company CEOs (46 percent), 40 percent of manufacturing and about a third of services CEOs (30 percent).
On the other hand, services CEOs are, on average, the most optimistic this year, with 44 percent expecting their general conditions to improve.
This anticipation of modest improvement comes after an extremely challenging year for most businesses in 2013.
“Indeed, for many businesses, any growth they see in 2014 will likely represent a recovery from 2013 rather than an outright expansion in their sales or production levels,” AIG said.
CONCERN ZONES
Among the areas of worry, “lack of customer demand” is again the most cited potential growth inhibitor for 2014, with 21 percent of all CEOs identifying customer demand as one of their top three “growth inhibitors” for the year.
This compared to the previous year’s result where around a quarter of all CEOs said customer demand was one of the main impediments to growth for 2013.
Industry-wise, lack of demand was the most cited growth inhibitor in mining services (24 percent), manufacturing (24 percent) and construction (23 percent).
“These expectations continue to reveal a general lack of business confidence about the outlook for the domestic economy and employment growth,” AIG said.
It also noted that there was “significant” uncertainty around the performance of non-mining sectors as mining investment starts to detract from economic growth over the coming years. “Nonetheless, businesses appeared to be somewhat less worried about customer demand in 2014 as compared to 2013,” it added.
Also among the most cited growth impediments were concerns over the exchange rate (10 percent) and competition from imports (11 percent).
“However, CEOs were less concerned about these factors impeding growth in 2014 than they were last year,” AIG said.
“This is likely to reflect the Australian dollar depreciation since March 2013, which has made local businesses more competitive in both export markets and relative to imports in their domestic markets,” it added.