AUSTRALIAN INDUSTRY INDEX

Supply-side pressures ease in February

Key findings

The Australian Industry Index® remained in contraction in February, but in trend terms showed the seventh month of gradual recovery.
Supply side pressures eased as input costs and average wages declined, while sale prices increased indicating a modest easing of margin pressures.
Demand side weakness continues, with the new orders and activity/sales indicators both well in contractionary territory.
Manufacturing and construction each lifted to their strongest monthly readings since mid-2022. While both indicators remain in contraction, this improvement reflects softening supply pressures.
Business services remains in broad-based contraction, yet to show the improvements seen in peer industrial sectors since mid-2024.

The Ai Group Australian Industry Index® declined by 1.1 points to
-17.6 points in February (seasonally adjusted). The index has indicated contraction for the last thirty-two months.

February 2025

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Industry activity

The activity/sales indicator contracted in February, falling by 3.4 points to -22.6. Over the past year, the indicator has shown improvement on a trend basis, though it remains in contractionary territory
The decline in employment eased by 2.9 points to
-14.6 points in February. On a trend basis employment has hovered in a narrow range for the past six months.
Businesses reported increasing competition from imports as customers sourced supplies directly.
Wages on government infrastructure projects drove competition for skilled staff and wages. An uptick in absenteeism impacted productivity for some industrials.

Leading indicators

New orders was broadly stable at -18.9 in February. This consolidates an improvement in the indicator seen in late 2024.
In trend terms the contraction in new orders has eased steadily from July 2024, though it remains in negative territory.
Input volumes rose by 15.6 points from the previous month to be neutral -0.5. In trend terms input volumes have contracted for over a year.
Following the holiday period businesses reported an uptick in orders in for February, but for shorter terms and smaller quantities than usual.

Prices and wages

In February pricing indicators showed mixed results, but in trend terms point to an easing of supply-side pressures on margins.
Both the input prices and average wages indicators eased, while sales prices increased by 3.5 to 7.6 in February.
The gap between input and sales price indicators narrowed to 32.8 points, indicating a modest easing of margin pressures.
The average wages indicator fell by 16.2 points down from its historical peak the previous month. At 32.2 it still suggests broad market pressures for wages growth.

Australian PMI® and PCI®

The Australian PMI® for all manufacturing improved by 13.2 points but continued to indicate contraction at -8.2. In trend terms this indicator has been improving since mid-2024.
The Australian PCI® (construction) rose by 14.4 points to -3.7 to be near neutral. In trend terms it remains in contraction but has been improving for six months.
Some manufacturers reported increased inquiries and orders amidst supply chain delays. However higher taxes and increased worker's compensation insurance premiums weighed on sentiment.
Activity levels for builders were very mixed with some reporting increased orders while others had slowing demand.

Upstream manufacturing

Upstream manufacturing strengthened in February.
The chemicals sector rose into expansion for the first time since June 2024, rising 12.8 points to 5.3.
Minerals and metals also improved by 7.9 points, but remained in contraction at -31.4.
Chemical manufacturers reported an increase in export orders driven by exchange rates. Others mentioned a lack of confidence among customers due to uncertainty about local economic conditions.
Minerals and metals reported higher input costs, restrictive regulation and a lift in absenteeism. Some observed an increase in infrastructure-related orders, as engineering projects picked-up.

Downstream manufacturing

The machinery & equipment indicator improved substantially rising by 13.5 to -17.2.
Machinery manufacturers reported supply chain pressures and rising labour costs. Some reported steady production due to stable demand, others mentioned adopting new technologies to increase efficiency.
Food, beverages & TCF improved rising by 3.8 points, to be broadly stable at -2.2.
A lift in export demand improved sales for a portion of businesses, and favourable exchange rates enabled sales price increases. Others reported higher than usual absenteeism rates impacted productivity.

Business-oriented services

The business services sector fell 4.9 points in February, to be deeper in contraction at -20.2. This indicator includes wholesalers, technical services, and supply chain/transport providers.
In trend terms, business services has not shown improvement since mid-2024 as seen in the manufacturing and construction industries.
Services businesses reported shortages of inputs due to supply chain disruptions. A fall in sales was driven by low consumer confidence.
Some reported increased export demand and an improvement in activity due to major projects starting up after the holiday period.

Capacity utilisation

Capacity utilisation in Australian industry moved down slightly to 79.4% in February.
This indicator has been very volatile across 2024, but in trend terms has been strengthening for the last 12 months.
Labour shortages, equipment limitations, and raw material shortages led to lower overall utilisation.
With declining demand, new orders, and sales, along with weakened consumer confidence, capacity utilisation is expected to weaken in coming months as businesses operate below their full potential.

About the Australian Industry Index

The Australian Industry Index is a monthly index that measures changes in activity in Australia’s industrial sectors. It provides diffusion indices which measure rates of changes in the level of industrial activity – expansion, stability or contraction. A positive reading indicates the activity is expanding; negative indicates contraction. The distance from 0 indicates the strength of the expansion or decline.

The Australian Industry Index is based on monthly surveys from a national sample of Australian businesses. It uses ANZSIC industry codes for classifying sectors, and weights survey results using ABS data on gross value added by sector. Seasonal adjustment and trend calculations follow ABS methodology. Read more on our detailed methodology.

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