Output and new orders both turned positive for the first time in six months, but 40% of firms reported higher input costs tied to Middle East fuel and shipping disruption. RBA decision due next week.
Australian manufacturing output grew in July for the first time in six months, according to the latest S&P Global survey, though firms said the war in the Middle East still has its hand on the inflation dial.
The headline seasonally adjusted S&P Global Australia Manufacturing Purchasing Managers' Index rose to 52.0 in July, up from 51.5 in June. That marked the fourth consecutive month above the 50.0 no-change threshold and the strongest reading since January.
Both output and new orders turned positive for the first time since February. Production expanded marginally. New orders rose for the first time since February. Growth in both measures was described as marginal, reflecting still-muted demand and ongoing inflationary pressures.
Job creation was the clearest bright spot. Manufacturers added staff for a third consecutive month at the fastest pace in six months. Some firms noted the hires were only temporary. Backlogs of work fell for a fifteenth straight month, though the pace of depletion was the slowest in six months. Stocks of finished goods edged down modestly. Firms rebuilt input inventories for a second consecutive month, supported by a renewed rise in purchasing activity, the first in three months.
Price and supply pressures eased but remained a drag on the sector. Input cost inflation slowed to its lowest rate since February. Costs still rose sharply. 40% of respondents reported an increase, driven chiefly by higher fuel and shipping costs linked to the Middle East conflict. Output price inflation also slowed, though only slightly. Charges continue to climb at a much faster pace than before the war began. Lead times on input deliveries lengthened again, with sea freight delays frequently cited. The deterioration in vendor performance was the least pronounced in five months.
New export orders fell once more, reversing a slight June rise. Higher prices and competition weighed on overseas demand. That points to a competitiveness headwind for trade-exposed sectors even as domestic conditions improve.
Andrew Harker, Economics Director at S&P Global Market Intelligence, said the renewed rises in output and new orders provided some reassurance that the sector was recovering from the downturn triggered by the outbreak of war in the Middle East. He cautioned that the recovery remained tentative, with growth still marginal amid ongoing price and supply pressures. He added that further deterioration in the Middle East situation left the forward path highly uncertain. The nascent recovery could prove fleeting should inflationary pressures begin to strengthen again in the months ahead.
Manufacturers themselves appeared cautiously optimistic. Confidence in the 12-month production outlook improved alongside planned capacity expansions. Those rose for a third straight month but remained below pre-conflict levels.
The input cost picture keeps upside risk in play for producer price inflation readings. The Reserve Bank of Australia will be watching those readings alongside any further escalation in the region. The RBA holds its next policy meeting in early August. Markets are split on whether easing can begin this year.
Harker's explicit warning tempers any strong directional conviction. A renewed spike in fuel or shipping costs would hit the same 40% of firms already reporting higher input prices. The sector's return to growth is only two months old.
AlphaScala's proprietary score for RBA (RB GLOBAL INC.) sits at 37/100, a Mixed label, reflecting the same tension between improving activity and persistent cost pressure visible in the PMI data.
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