Australia PMI at Five-Month High Masks Continued Output Decline

Australia's manufacturing sector expanded for a third straight month in June, with the S&P Global Australia Manufacturing PMI rising to 51.5 from 50.7 in May. That is the highest reading since January. The headline, however, masks a softer underlying picture. Output fell for a fifth consecutive month, and new orders continued to contract, though the pace of decline in both eased.

New export orders returned to growth after two months of contraction, providing a partial offset. Firms cited client uncertainty and rising prices as constraints on domestic demand. The improvement in exports helped slow the overall drop in new orders to the weakest in the current four-month sequence.

Price pressures, which have been a defining feature of the sector since the Middle East war began, eased sharply from May. Input and output cost inflation remained elevated but slowed markedly. Andrew Harker, Economics Director at S&P Global Market Intelligence, said the slower rate of price increases in June was an encouraging sign for the months ahead, provided the geopolitical situation does not worsen again. He noted that the conflict continued to weigh heavily on the sector through the month despite the memorandum of understanding signed between the US and Iran in June.

Supply chains remained under strain. Suppliers' delivery times lengthened substantially again as some suppliers consolidated deliveries to manage costs. That encouraged manufacturers to build pre-production inventories at the fastest pace since last September, even as overall purchasing activity edged lower. Firms added staff for a second consecutive month, citing both replacement of departed workers and preparation for new projects. Backlogs of work were depleted further.

Business confidence for the year ahead climbed to a four-month high, though sentiment remains below levels seen before the war began. Firms' optimism rests on hopes that new orders will return to growth as conditions stabilise.

The easing in price pressures is the most market-relevant signal from the report. It supports the case that the worst of the oil-driven cost shock may be behind manufacturers, provided the geopolitical situation does not deteriorate again. For the Reserve Bank of Australia, the data reduces the urgency for further tightening, though the central bank has stressed it remains data-dependent. The next key input for the RBA will be the quarterly CPI release due July 31. Harker said the slower rate of price increases was an encouraging sign for the months ahead, provided the geopolitical situation does not worsen again.