Manufacturing On The Slippery Slide

The Age

Tuesday September 2, 2008

Ari Sharp

IT'S a tale of two sectors. While a surge in the price paid for coal and iron ore exports has reduced Australia's current account deficit, the nation's manufacturing sector has gone backwards for a third straight month.

The latest data gives evidence of the divergent trends in the Australian economy, demonstrating the extent to which it is reliant on developing world growth to push up demand for resources and its consequent vulnerability if global growth - more particularly, Chinese growth - slows down.

During the second quarter, Australia's current account deficit narrowed to $12.8 billion, from $19.8 billion a year earlier. But the latest number, released yesterday by the Australian Bureau of Statistics as part of the balance of payments figures, fell short

of the drop to $11.7 billion expected by economists.

The improvement was largely due to the goods and services balance, where a $7.3 billion deficit in the first quarter was transformed into a $560 million surplus in the second. And that figure, in turn, was brought about by a steep rise in contract prices for coal and iron ore, Australia's two largest commodity exports, pushing up the value of non-rural exports by 26%.

In early July, BHP Billiton secured an 85% increase in the price paid for iron ore by Chinese steel maker Baosteel. The deal followed a similar agreement reached by Rio Tinto, and allowed the two mining giants to achieve the same price rise in other Asian markets.

"In the June quarter alone, the extra income from coal and iron ore exports translated to almost $400 for every Australian,"

said CommSec chief equities economist Craig James.

Despite the price surge, net exports are forecast to shave

0.1 percentage point from second-quarter GDP growth.

But JPMorgan economist Helen Kevans said she expected that "net exports will eventually add to economic growth in 2009, as the currency continues to trend south and solid business investment, particularly in mining, continues to help alleviate the infrastructure bottlenecks that have hampered our export performance".

The improvement in resource exports will serve to further widen the gap on the manufacturing sector, which contracted for a third straight month, according to the Australian Industry Group-PricewaterhouseCoopers Performance of Manufacturing Index.

Seasonally adjusted, the index rose by 0.1 in August to 47.0, leaving it below the 50-point mark separating expansion from contraction. The survey of more than 200 companies in the sector found that despite small improvements on a month earlier, production, employment, new orders and exports all remained in negative territory

"The further fall in the Australian PMI shows that manufacturers remain under pressure," said PricewaterhouseCoopers industrial manufacturing leader Graeme Billings.

During August, trucking company Kenworth announced it would lay off 80 staff from its Bayswater plant, Unidrive sacked 40 workers from its Clayton factory and fellow automotive parts maker PBR made

80 workers redundant from its East Bentleigh operation.

"Manufacturing is caught in a bind between falling demand and higher input costs," Australian Industry Group chief executive Heather Ridout said.

© 2008 The Age

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