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No signs of relief for manufacturing, says PMI

More bad news on the manufacturing front today with the Australian Performance of Manufacturing Index (PMI) contracting for an eighth consecutive month in January, reflecting the challenging January month for businesses.

The Australian Industry Group – PricewaterhouseCoopers Australian PMI registered 36.6 points last month, which is up by 2.9 points on December 2008 but still well below the 50-point level which separates expansion from contraction.

The disappointing result confirms that manufacturers are facing an increasing profitability squeeze for the duration of 2009, says PricewaterhouseCoopers global leader of industrial manufacturing, Graeme Billings.

“While input and wages costs are showing signs of rising more slowly, this is merely the symptom of weaker demand for manufactures and consequently lower production and employment levels,” he said.

“In these conditions, where the potential for sales growth is constrained, the key responses remain a rigorous focus on unit cost management, reassessment of business plans and a focus on retaining competitive strengths through innovation in products and operations and the retention of skilled workers.”

The Australian PMI showed that activity in the transport equipment, machinery and equipment, basic metals products and construction materials fell solidly throughout January.

Activity in the fabricated metal products, chemicals, petroleum and coal products industries fell at a reduced rate, but still affected the total Australian PMI.

Production, new orders and supplier deliveries continued to decrease during the month, while employment declined for an 11th consecutive month — even though the pace of redundancies was slower than in the final quarter of 2008 — according to the report.

Australian Industry Group (Ai Group) chief executive, Heather Ridout, said that the ongoing falls in new orders in particular highlights the challenging conditions manufacturers are facing in the early months of the New Year.

Ridout said this has led manufacturers to work on reducing inventories, which could lead to lower production and consequently put further pressure on employment.

“While lower interest rates and government stimulatory and other measures are helpful, and may have impacted on the positive outcome for the food and beverage sector, more will need to be done and business will be looking for a further significant cut in interest rates this week,” Ridout said.

The Australian PMI is a seasonally-adjusted national index based on production, new orders, deliveries, inventories and employment in the manufacturing industry with varying weights per variable. An Australian PMI reading above 50 points indicates that manufacturing is generally expanding; below 50, that it is declining.

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