This week Ai Group’s monthly business surveys showed that Australia’s manufacturing and services sectors continued to expand in July, but they appear to be slowing as we head into the new financial year.The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI®)fell 5.4 points to 52.0 in July, indicating continuing but slower growth across the manufacturing sector, while the Australian Performance of Services Index (Australian PSI®) fell 9.4 points to 53.6 in July, indicating slower growth in July after June’s record high. The Performance of Construction Index (Australian PCI®) will be released next Tuesday 7 August.
The ABS ‘cost of living’ indexes released this week provide useful supplementary detail to the Consumer Price Index (see our Economics Weekly 27 Jul2018). The cost of living for employee households rose by 2.3% p.a. in the June quarter (Q2) of 2018, indicating stronger cost increases than in the March quarter (Q1) of 2018, largely because of higher petrol prices in Q2.
Also in June, Australia’s trade surplus grew to $1.8bnfor the month, driven by the rising value of exports and the lower value of imports. A solid rise in the value of Australia’s three biggest commodity exports-iron ore, coal and LNG-lifted total export earnings in June.Exports of manufactured goods were also up in June and have risen slightly over the year2017-18. Over the past two decades, high-skill and technology-intensive manufacturing exports have more than doubled, while labour intensive and low-skill manufacturing exports have remained relatively flat.
Other data released this week suggest buoyant residential construction activity will continue for the rest of 2018. Building approval numbers rose by +6.0%m/min June and are up +1.0% over the year.Looking through the volatile monthly numbers, the value of residential building approvals remains high, supported by record low interest rates and strong population growth. The value of non-residential approvals is slowing already however, after reaching a recent peak in 2017. RBA lending data shows that owner-occupiers are continuing to apply for loans (up7.8% over the year) but loans to property investors fell in June, for the first time since early 2009. Business lending edged up for the month of June, but is still only growing modestly at 3.2% p.a.
Manufacturing and services growth softens in July
The Australian Industry Group Australian Performance of Manufacturing Index (AustralianPMI) fell 5.4 points to 52.0 in July, indicating continuing but slower growth across the manufacturing sector (seasonally adjusted). Results above 50 points indicate expansion with higher results indicating a stronger expansion.
Growth was led by the larger sub-sectors of food & beverages, petroleum, coal & chemical products, non-metallic minerals and machinery and equipment. The smaller sub-sectors of wood & paper products and the ‘textiles, clothing & other manufacturing’ sub-sectors contracted in July. The metal products sub-sector was stable, at around 50 points in July and has been slowing in recent months, after welcome recoveries in orders in 2017 and early 2018.Some respondents in this sub-sectornoted that increased competition from cheaper imports is limiting their ability to win contracts or raise their selling prices, despite increasing costs for their raw materials.
Infrastructure projects continue to support demand for manufacturing products, but rising energy costs and growing wage pressures are constraining activity. The average wages sub-index rose by 1.8 points to 60.6 points in July, indicating a faster rate of wage increases across manufacturing. Many respondents noted an increase in wage rates from 1 July –the date when the Fair Work Commission’s 3.5% minimum wage rise came into operation. Employment was stable in July after a year of growth suggesting that employers may be wary of the increased costs of employment as the FWC decision reverberates through the labour market.Private-sector manufacturing wages rose by 2.2% p.a. in Q1 2018, up from the recent trough for wages grow thin Q4 2016 of 1.8% p.a.
The Australian Performance of Services Index (Australian PSI) fell by 9.4 points to 53.6 points (seasonally adjusted), indicating slowing growth in July compared to June(seasonally adjusted). The Australian PSI indicated expansion in six of nine sub-sectors in July (trend). The predominantly business-oriented sub-sectors such as property, finance and transport reported steady demand from customers in construction and manufacturing; while the health sector also reported positive conditions in July.Consumer-oriented sub-sectors had mixed results in July. Personal & recreational services increased substantially over the month, while retail trade was stable, and hospitality contracted (trend). Businesses in some of these sub-sectors continue to report judicious discretionary spending.
Cost of living rises because of higher oil prices in Q2 2018
The ABS cost of living cost indexes provides useful supplementary detail to the Consumer Price Index (CPI, last released in July for Q2 2018). Living cost indexes are provided for four different types of households: employees; age pensioners; self-funded retirees; and other government transfer recipient households (mainly disability pensioners). The cost of living index for employee households increased by the same amount as the CPI in Q2(+0.4% q/q). Higher petrol prices were one of the main contributors across all living cost indexes in Q2. Over the year to Q2, the pace of change in the cost of living for employee households increased to 2.3% p.a. in Q2of 2018, the fastest annual increase since Q2 2014(Chart 2).
In contrast, the cost of living for ‘other government transfer recipients’ recorded a smaller rise(+0.3%)compared to the CPI (+0.4%)in Q2, because of price deflation for pharmaceutical products(which account for a bigger share of spending for aged and disability pensioners than for other population groups). Over the year however, ABS cost of living indexes rose by 2.7%p.a. in Q2 for households headed by‘other government transfer recipients’.
Trade surplus grows in June 2018
Australia’s monthly trade surplus rose to $1.9bn in June 2018, an increase of $1.1bn from a surplus of 0.7bn in May 2018 (seasonally adjusted). The sum of trade balances for the three months to June (Q2) of 2018 was a surplus of $3.2bn, slightly lower than the surplus of $3.4bnfor the first three months of 2018. Over the year to June2018, the value of all exports rose by 12.9% p.a. while the value of all imports rose by 10.4% p.a. indicating the continuation of vibrant two-way trade.
Historically, monthly trade deficits have been the prevailing norm for Australia (see Chart 5). However, recent growth in iron ore and coal export volumes and prices have resulted in monthly trade surpluses for most months since late 2016 (except for April 2017 and December 2017). Service exports have also grown since the Australian dollar fell below parity against the US dollar in 2013. After stabilising in 2017, service exports have increased gradually in 2018 to $7.4bn in June as the dollar has steadily weakened.
Exports increased by $914mn in June, driven by solid gains in resources (+$366mn) manufactured goods (+$264mn), rural exports (+$181mn), and services ($87mn). An increase in LNG shipments (+414mn) and demand for thermal coal exports (+226mn) drove resource exports higher in June. Iron ore also made a modest gain, mainly due to higher prices.
In contrast to exports, the value of imports fell by $233mn to $34.6bn in the month of June, further widening the trade surplus. Total imports were dragged down by imports of ‘intermediate goods’ (-400mn),due to falling imported fuel costs (-$366mn) after rising by $184mn in May. Consumption goods also dragged on imports because of weakness in imports of textiles, clothing and footwear which fell by $68 million.This was partially offset by a rise in capital goods which rose mainly due to the rise in imports for non-industrial transport equipment (mostly cars).
High skill/technology intensive manufacturing exports continue to rise
In 2017-18, the annual value of Australia’s manufacturing exports rose to $47.1bn, up by$0.6bn from $46.5bn in 2016-17, despite the final cessation of automotive assembly and exports in that year. Slower growth in total exports of manufactured goods has been evident in the Australian PMI exports sub-index, which has weakened over the past year, suggesting that recent buoyant conditions across the manufacturing sector have been driven more by domestic demand.
Machinery exports (excluding transport equipment) were up by 3.8% to $10bn in 2017-18 while transport equipment exports fell by 14.4% to $4.2bn, as exports of passenger cars ended with the final cessation of passenger car assembly in Australia. Exports of manufactured goods other than machinery (e.g. food, health products, building materials) grew by 7.4% to $20.4bn.
Within manufacturing, exports can be classified according to their level of skill and ‘technology intensity’. The United Nations Conference on Trade and Development (UNCTAD) splits exports of manufactured goods into four categories, based on their level of skill and technology intensity:
- Labour-intensive and resource-intensive manufactures;
- Low-skill and technology-intensive manufactures;
- Medium-skill and technology-intensive manufacturers; and
- High skill and technology-intensive manufactures.
Applying this UNCTAD classification to ABS data suggests that in 2017-18,54% of Australia’s exports of manufactures can be classified as high skill and technology intensive and 28% is medium-skill and technology-intensive. In contrast, only about 18% are either labour and resource intensive or low skill and technology intensive exports.
Over the past two decades, exports of labour intensive and low-skill exports have been relatively flat. This likely reflects Australia reducing tariff barriers, intense global competition and the progressive relocation of production to lower labour cost emerging and developing economies. Medium-skill and technology-intensive exports rose from 1998 to 2008 but have fallen over the most recent decade. The sharp decline in early 2009 reflects declining exports of passenger cars.
In contrast, high-skill and technology-intensive exports have more than doubled over the past two decades. Between 2008 and 2015 high-skill and technology-intensive exports were relatively flat, probably reflecting a high Australian dollar during the mining investment boom. However, since 2015, these exportshave begun to rise again and increased 8.9% in 2017-18. Australia’s main high-skill and technology-intensive exports in 2017-18 were medicaments (including pharmaceuticals, medicines and veterinary medicaments),telecommunication equipment & parts and aircraft parts and equipment.
Australia’s manufacturing sector is diverse and comprised of multiple sub-sectors that are continuing to adapt to changes in their operating environments.Intense pressure from global competition, a high Australian dollar during the mining investment boom, high labour costs and disruptive technological change have meant manufacturing firms have had to innovate and invest, with many looking to sell highly-skilled and technology-intensive products on the global stage.
