Australia Manufacturing Contracts a Second Month as Rising Currency Bites

Australian manufacturing contracted in October for a second month as the nation’s surging currency eroded demand for exports.

The performance of manufacturing index increased to 49.4 from 47.3 a month earlier, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today. A number below 50 indicates contraction.

The nation’s factories are lagging the mining industry, which is expanding to meet rising Chinese demand for raw materials, pushing the job market close to a level the government views as full employment. The Australian currency surged to parity with the U.S. dollar on Oct. 15, driving down the cost of imported goods and eroding exporters’ competitiveness.

“Manufacturers continue to be inhibited by strong overseas competition amid the strengthening Australian dollar, soft domestic demand and an intensification of skill shortages,” said Heather Ridout, chief executive officer of the Australian Industry Group, in a statement.

The report comes as 17 of 23 economists surveyed by Bloomberg News expect central bank Governor Glenn Stevens and his board to leave the overnight cash rate target at 4.5 percent, with the others predicting an increase to 4.75 percent. The decision is scheduled for 2:30 p.m. tomorrow in Sydney.

Rate Increases

Stevens and his board raised rates in six quarter- percentage-point steps between October 2009 and May this year.

“The industry also remains wary of the impact of interest- rate rises at a time when strong competitive pressures are ensuring that inflationary pressures remain moderate,” Ridout said.

Australia is undergoing a hiring boom as companies such as BHP Billiton Ltd. and Rio Tinto Group increase shipments of iron ore and coal to China. Australia’s unemployment rate, at 5.1 percent in September, is about half the level of joblessness in the U.S. and euro zone.

Manufacturers are also facing the challenges of “sluggish” domestic demand, today’s report said.

The manufacturing survey, which is similar to the U.S. ISM index, polled more than 200 companies about production, new orders, deliveries, inventories and employment.

The contraction was led by falls among manufacturers of textiles and contractions in food and beverages, wood products and furniture industries, today’s report shows.

In contrast, there was a rebound in clothing and footwear, construction materials, basic metals and machinery, and equipment, the report showed.

A sub-gauge of employment rose 5.4 points to 50.2 in October, and new orders dropped 3.4 points to 43.1, today’s report showed. An index of production climbed 3.2 points to 49.4.

To contact the reporter on this story: Michael Heath in Sydney at mheath1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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