Australia’s manufacturing sector continued to face challenging conditions in May, with new orders falling at the fastest pace since October last year as strong inflationary pressures and ongoing supply-chain disruptions weighed on demand, according to the latest S&P Global Australia Manufacturing PMI.
The seasonally adjusted S&P Global Australia Manufacturing Purchasing Managers’ Index (PMI) eased to 50.7 in May from 51.3 in April.
While the reading remained above the 50.0 threshold that separates expansion from contraction, other survey indicators pointed to weakening business conditions across the sector.
S&P Global reported that new orders declined for a third consecutive month and at the steepest pace in seven months.
Survey respondents cited squeezed customer budgets, sharp price increases and subdued demand as key factors behind the fall in sales. Export orders also decreased, with some manufacturers reporting weaker demand from Asian markets.
Manufacturing output fell for a fourth straight month, although the rate of decline was softer than in April. Firms attributed lower production to weaker sales, rising costs, uncertainty linked to the conflict in the Middle East and staffing challenges.
Cost pressures remained significant during the month. Manufacturers reported substantial increases in both input costs and selling prices, driven largely by higher fuel and transportation expenses.
Although input cost inflation eased slightly from April, it remained the second-fastest increase recorded in nearly four years. Output price inflation accelerated further, reaching its highest level since August 2022.
Supply-chain conditions also remained under strain. S&P Global said higher fuel costs and international shipping delays related to the war in the Middle East contributed to longer supplier delivery times, which lengthened to the second-greatest extent in 46 months.
Reflecting softer demand, manufacturers reduced purchasing activity and cut stocks of inputs after increases in April. Inventories of finished goods also declined.
One positive development was a modest increase in employment, marking the first rise in staffing levels in three months. Survey respondents said hiring was aimed at improving production efficiency and preparing for future projects.
At the same time, firms were able to reduce outstanding workloads as staffing levels rose while new orders weakened.
Business confidence remained subdued, although optimism improved slightly from April. Manufacturers cited ongoing uncertainty linked to the Middle East conflict and the impact of higher prices on customer demand, while expressing hope that order volumes would improve over the coming year.
Andrew Harker, economics director at S&P Global Market Intelligence, said the latest survey highlighted continuing pressures on the sector.
“Familiar themes were evident in the Australian manufacturing PMI data during May, with the war in the Middle East continuing to cause steep price rises and supply-chain disruption. As a result, firms are finding it increasingly difficult to secure new orders,” Harker said.
He added that the increase in employment provided some encouragement but warned that it may not continue if demand remains weak.
“One small positive from the latest survey was a rise in employment as firms looked to speed up production lines. The increase was only marginal, however, and unlikely to be sustained if new business continues to fall in the months ahead.”
Harker also noted that historical comparisons between PMI readings and official data suggest manufacturing output could decline in the second quarter unless conditions improve significantly in June.
“Based on historical relationships between the PMI figures and official data, we face the prospect of official manufacturing figures showing a fall in production during the second quarter unless we see a marked turnaround in fortunes during June,” he said.
