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Australian Manufacturing Shrinks First Time in 2010

Australian manufacturing contracted in September for the first time in nine months as the nation’s surging currency eroded demand for locally produced clothing and construction materials.

The performance of manufacturing index slumped 4.4 points to 47.3, the Australian Industry Group and PricewaterhouseCoopers said in a survey released in Canberra today. A figure below 50 shows the industry is shrinking.

The nation’s manufacturing sector contrasts with the mining industry, which is expanding to meet rising Chinese demand for raw materials, pushing the jobs market close to what the government and central bank consider full employment. The nation’s currency surged last month to its highest level against the U.S. dollar in more than two years, driving down the cost of imported goods and eroding the competitiveness of exporters.

“The strength of the Australian dollar in particular, led by large rises in minerals prices, is challenging the competitive position of the sector in both the domestic and export markets,” said Heather Ridout, chief executive officer of the Australian Industry Group.

Manufacturers are also facing the challenges of slower private sector spending growth alongside increased wage pressures, today’s report said.

“This combination of factors underlines the vulnerability of manufacturers to interest rate rises,” Ridout said.

Rate Bets

Investors expect Australia’s central bank to this year resume the most aggressive round of monetary policy tightening by a Group of 20 member, which saw the nation’s benchmark lending rate climb to 4.5 percent in May from a half-century low of 3 percent a year ago.

Traders calculate a 44 percent chance of a quarter-point boost to the benchmark rate to 4.75 percent at the central bank’s meeting on Oct. 5, according to Bloomberg calculations based on interbank futures on the Sydney Futures Exchange at 9:37 a.m. The chance of a move by December is 100 percent.

Speculation about likely rate increases has helped stoke the Australian dollar, which has gained 10.9 percent in the past 12 months, the best performer among the 16 most actively traded currencies. The currency traded at 96.41 U.S. cents at 9:36 a.m. in Sydney from 96.40 cents before the report was released.

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

The drop in the gauge was led by further falls among manufacturers of food and drinks products, fabricated metals, as well as clothing, footwear and construction materials, today’s report shows.

A sub-gauge of employment tumbled 6.5 points to 44.8 in September, and new orders slipped 4.1 points to 46.5, today’s report showed. An index of production dropped 5.3 points to 46.2.

Today’s report “points to the importance of productivity- boosting policy measures including in the areas of innovation, education and training, taxation and workplace relations,” Ridout said.

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