Australian factory activity shrinks at fastest pace in 21 months as new orders slip

The drop in new orders — which ended two months of improvement — drew the most attention as the PMI fell from 52.0 to 49.6, signalling softer factory momentum. The combination created mixed signals for policy debates: softer demand and job losses called for patience, while elevated oil, raw material and freight costs combined with longer supplier delays due to the Middle East war kept price pressures alive. This kept oil and transport costs as a channel through which the conflict feeds into Australian producers, even though input cost inflation moderated slightly. Since this is just one survey of one sector, markets will need confirmation from services and broader activity data before changing their view of the economy.

---

Earlier report:

• AUD/USD vulnerable to larger decline below 0.7000 as RBA rate hike fails to support aussie

---

Australia's manufacturing sector entered contraction as new orders posted their first decline since June, with employment cuts, weaker output and Middle East supply disruption adding to the pressure.

Summary:

• The S&P Global Australia Manufacturing PMI dropped to 49.6 in September from 52.0 in August, a marginal contraction that was the sharpest in 21 months.
• New orders declined for the first time since June, and export orders also fell after rising in August.
• Output declined for a second straight month at the fastest pace since December 2024, and headcounts fell for the first time in five months.
• Supplier delivery times lengthened further as the Middle East war disrupted shipments, and input costs remained high, though the rate of input inflation eased slightly.
• Selling prices rose at the slowest pace in seven months as firms faced tougher competition.
• Manufacturers remain positive on the 12-month outlook, but confidence slipped to a four-month low.

At the end of the third quarter, Australia's manufacturing sector lost steam, with the S&P Global Australia Manufacturing PMI falling to 49.6 in September from 52.0 in August. A reading below 50 indicates contraction, and this marginal drop was the most pronounced in 21 months.

New orders were the main driver, falling for the first time since June as intense competition, higher prices and weaker underlying demand weighed on sales, according to survey respondents. Export orders also declined after rising in August. Output decreased for the second consecutive month, at the fastest rate since December 2024, as producers reduced production in response to lower workloads.

The softer demand flowed through to the labour market. Manufacturing employment edged down, the first decline in five months, with anecdotal evidence pointing to resignations and redundancies. Backlogs of work fell for the 17th consecutive month, interpreted by the survey as a sign of spare capacity. Purchasing was cut at the sharpest pace in four months, and stocks of purchases fell. In contrast, stocks of finished goods rose for the first time in eight months, reflecting weak demand and delays in outbound shipments.

Supply conditions worsened further. Supplier delivery times lengthened more than in August as the Middle East war continued to disrupt international shipments, with severe weather around North Asia also cited as a cause of delays. Input prices rose again, especially for raw materials, oil and transport, though the rate of inflation eased slightly from August. Firms passed on only part of the extra cost to clients because of heightened competition, making the rise in selling prices the slowest in seven months.

An S&P Global economist said the decline in new orders showed that demand had yet to stabilise after improving in July and August, and that hiring trends were worth monitoring given that business confidence also fell. Despite easing price pressures, she noted, goods producers still faced high costs and deteriorating supply conditions, leaving firms operating in relatively challenging conditions.

Australian manufacturers nonetheless remained positive on the 12-month production outlook, expecting business development plans and new products to lift sales. However, the degree of confidence slipped to a four-month low after the latest fall in new orders. The survey data were collected between 10 and 24 September.