Australia’s manufacturing sector contracted at an accelerated pace in December 2024, as both domestic and export demand weakened further.
According to S&P Global, the Manufacturing Purchasing Manager’s Index (PMI) dropped to 47.8 from 49.4 in November, marking the eleventh consecutive month of declining conditions.
This decline was driven by quicker reductions in new orders, which compounded the contraction in manufacturing output.
Jingyi Pan, Economics Associate Director at S&P Global Market Intelligence, highlighted the worsening challenges faced by the sector.
“December’s Australia Manufacturing PMI data outlined a further softening of conditions in the goods-producing sector. After showing signs of easing in November, the downturn worsened at the end of the year, reflecting sustained domestic and external pressures.”
The contraction in new orders was attributed to elevated interest rates and reduced demand from key export markets, including the US, Europe, Asia, and New Zealand.
With diminished inflows of work, manufacturers scaled back production, extending the decline in output to more than two years.
This downturn also led to the depletion of backlogged orders, further reducing capacity pressures.
Job shedding resumed as firms adjusted to the lower demand environment, while purchasing activity and inventory levels were reduced.
Stocks of finished goods also fell for the eleventh time in 2024, underscoring manufacturers’ reluctance to hold additional inventory amidst declining demand.
On the cost front, input prices surged in December due to rising shipping and energy costs.
Supply chain constraints caused a significant lengthening of vendor lead times, pushing input cost inflation to its highest level since July.
To offset these increased costs, manufacturers raised selling prices, with the rate of output price inflation climbing to a two-month high.
Despite the deepening contraction, business sentiment reached its highest level since August 2022. Pan noted the optimism among firms: “Confidence soared to the highest level since August 2022, with firms indicating expectations for a better 2025 as they look to lower interest rates to provide a boost to the economy. This was a positive sign, hinting at a potential turnaround in the new year.”
Looking ahead, the Reserve Bank of Australia’s expected rate cuts in early 2025 could provide much-needed relief for the sector.
However, Pan cautioned that rising selling price inflation could weigh on demand.
“It will be important to monitor any improvements on the demand side as we look to the likelihood for the Reserve Bank of Australia to commence lowering rates in the first quarter of 2025.”
“Additionally, at less than two points below the long-run average, rising selling price inflation will also need to be watched for any negative impact on sales next year,” Pan said.
