Australia’s manufacturing sector moved back into contraction in March, according to data from S&P Global, with the downturn driven by weaker demand and rising cost pressures linked in part to geopolitical tensions.
The seasonally adjusted S&P Global Australia Manufacturing Purchasing Managers’ Index fell to 49.8 in March from 51.0 in February, dropping below the 50.0 threshold that separates growth from contraction and signaling a marginal deterioration in manufacturing conditions.
According to S&P Global, new orders declined for the first time in five months, reflecting subdued customer demand and reduced market confidence. At the same time, production fell for a second consecutive month, with some firms citing ongoing material shortages as a constraint on output.
Andrew Harker, economics director at S&P Global Market Intelligence, said the sector was feeling the impact of external pressures.
“The Australian manufacturing sector suffered some of the effects of the war in the Middle East in March, most notably an intensification of inflationary pressures and disruption to supply chains,” he said.
Despite the overall decline in new orders, export demand remained a relative bright spot, with new export orders rising at the fastest pace since May 2021. However, S&P Global noted that stronger exports were not enough to offset broader weakness in domestic demand.
S&P Global stated that supply chain disruptions intensified during the month, with suppliers’ delivery times lengthening to the greatest extent in nearly a year and a half. Firms linked delays to shipping disruptions associated with the conflict in the Middle East, according to the report.
Cost pressures also accelerated sharply. Input price inflation reached its highest level in three-and-a-half years, driven largely by higher oil prices and increased freight and fuel costs. Around 40% of surveyed firms reported rising input costs in March. Output prices also increased at a faster pace, marking the strongest rise since February 2023.
Harker said demand conditions remained uncertain despite export resilience. “Customer demand also waned, despite a sustained expansion in new export orders. It remains to be seen how long international demand will be able to hold up given the wider environment,” he said.
In response to softer demand, manufacturers reduced purchasing activity for the first time in five months, while stocks of inputs fell at the fastest rate in 16 months. The report also noted that employment declined, with firms citing lower workloads, cost pressures and difficulties replacing departing staff.
Business confidence weakened notably, with sentiment regarding the year-ahead outlook for production falling to a 20-month low. While some firms expressed optimism tied to export growth and a potential recovery in domestic demand, concerns about the duration and impact of geopolitical tensions weighed on expectations.
“Indeed, firms were much less optimistic regarding the future than they had been in February,” Harker said. “Whether the sector can resume growth in the second quarter will in large part depend on how long the war in the Middle East persists.”
