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Manufacturing hits GFC lows

Manufacturing activity has slumped to its lowest level since the depths of the Global Financial Crisis in May 2009.

The Australian Industry Group’s Performance of Manufacturing Index (PMI) fell off a cliff in April, sliding 7.7 points to 36.7, well below the 50 level that separates contraction from expansion.

Seven of the eight manufacturing sub-sectors recorded falls, many dropping to levels not seen since 2009. The wood and paper products sub-sector was the only sector to expand in April, although only slightly. Strong falls were recorded food, beverage and tobacco products, printing and recorded media, non-metallic mineral products, metal products and machinery & equipment.

Sharp declines in production, new orders and employment were also recorded in April, while finished goods and deliveries decline at a moderate pace. Exports continued to contract for the ninth consecutive month, as the exports sub-index fell to its lowest ever recorded reading (which commenced in 2004).

Worryingly, the rate of change for most sub-sectors was increasing, while wages and input costs rose strongly. “The strong Australian dollar is a major burden on domestic producers, and our rising unit labour costs and high energy prices are adding to pressures,” said the Australian Industry Group’s chief executive, Innes Wilcox.

Large bulk commodity exporters like BHP Billiton (ASX: BHP), Rio Tinto Limited (ASX: RIO), New Hope Corporation (ASX: NHC) and Whitehaven Coal (ASX: WHC), are not just facing pressure from the high Australian dollar, but also lower prices for iron ore and coal, amongst other commodities.

The high dollar and rising labour costs means Australia is now one of the highest cost manufacturing centres internationally, according to Mr Wilcox. They are also proving to be a major barrier to attracting inbound investment in domestic manufacturing.

Foolish takeaway

The news could see the Reserve Bank cut official cash rates next week, in an effort to bring the dollar down and bring some relief to the local manufacturing industry.

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