Exports and the dollar drive manufacturing resurgence

The Australian Industry Group’s Australian Performance of Manufacturing Index (Australian PMI®) surged to 58.1 points in March, its highest level since April 2004 and a ninth straight month of expansion. This was the longest run of expansion for the Australian PMI® since 2006.

Growth in production, sales, employment, exports and new orders boosted manufacturing in March. Export volumes were up, especially in the large food and beverages sub-sector. However, conditions were mixed across other manufacturing sub-sectors, with weak demand evident in some sub-sectors. The automotive industry’s exit is still in train and lower levels of mining investment are dampening demand for some types of equipment. Some manufacturers noted increasing cost pressures from imported inputs and electricity prices.

Exports have been a primary driver behind the strong performance of the Australian PMI® over the past six to twelve months. The exports sub-index climbed 3.5 points to 57.2 points in March and remained firmly positive. The sub-index expanded for a seventh month in a row and has averaged 53.0 points over the past twelve months.

This strong export performance is mainly due to the boost from the lower Australian dollar. The dollar has appreciated quite strongly since mid-January, but it is still about 30% lower against the US dollar than it was three years ago.

The Trade Weighted Index (TWI) is also relatively low, despite some gains in early 2016. In February, the TWI was 4.2% lower than a year earlier and 22.4% lower than its peak in March 2013 (see Chart 1). The exports sub-index of the Australian PMI® indicates that manufacturing exports are responding well to this drop in the dollar.

Chart 1: Ai Group Australian PMI® exports sub-index and the TWI

Chart 1: Ai Group Australian PMI® exports sub-index and the TWI

This export-driven recovery is especially evident in the food, beverages & tobacco sector, which continued to accelerate strongly in March. Its sub-index jumped a further 9.3 points to a record 71.0 points.

Food and beverages respondents in the Australian PMI® flagged an increase in exports and increasing global competitiveness as a key source of growth in 2016. This sector will likely grow further as it responds to enhanced access to new markets (as new free trade agreements come into effect) and growing demand for processed foods from Asia and the Middle East.

Are you a manufacturer in the food and beverages sub-sector? How has the dollar impacted your business in the past six months and where do you see it going from here? Share your comments below.

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Julie heads the Australian Industry Group’s economics team, producing economics research, comment and policy advice for Ai Group and its members. She is also: Adjunct Professor of Economics and advisory board member at Deakin University; panel member of the Melbourne Economic Forum at the University of Melbourne; and a member of the National Economic Policy Panel of the Economics Society of Australia.

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