THE soaring value of the dollar and the Reserve Bank's rate rises are forcing manufacturers to slash production and employment.
Greece is the only country in either the industrialised or the emerging world where manufacturing is performing worse, according to the December performance of manufacturing index, which is a survey conducted globally.
JPMorgan senior economist Helen Kevans said that in the rest of the world, the manufacturing industry was gaining momentum with economic recovery.
"In contrast, the Australian manufacturing sector is still contracting, with the currency being the main issue," Ms Kevans said.
"The Australian dollar was an average of 5 per cent higher in the December quarter."
The survey, conducted locally by PricewaterhouseCoopers and the Australian Industry Group, shows most manufacturers have now been contracting for the past four months, with December's result the worst in a year and in line with scores recorded during the financial crisis.
The index measure dropped to 46.3 points, below the 50-point mark that separates expansion from contraction. Idle capacity in manufacturing has now risen to 27.7 per cent.
Ms Kevans said manufacturing was being squeezed by the mining boom, which was attracting the investment capital and the skilled labour.
The boom continues to gather strength with commodity prices climbing to a new peak, according to the Reserve Bank. Its commodity price index advanced 3.2 per cent in December because of price rises in iron ore, coal, and also wheat.
Commonwealth Bank chief currency strategist Richard Grace said the dollar could be expected to remain strong until economic recovery in the US forced interest rates there higher. He said that could take another three to six months.
"Australian interest rates are high and, more to the point, European and US interest rates are at extreme lows that are not sustainable," Mr Grace said.
The head of PwC's global manufacturing division, Graeme Billings, said conditions were difficult even in industries that were not subject to import competition, such as construction materials. "Building materials are a good barometer of confidence within the economy," Mr Billings said. "Through the second half of 2010, activity flattened."
He said the wind-down of the government's school-building program contributed to weaker conditions.
Australian Industry Group director Innes Willox said the Reserve Bank's rate rises last year had made the competitive position of Australian manufacturers more difficult.
"Concerns about where interest rates will go from here has raised questions about investment in manufacturing," he said.
Source http://www.theaustralian.com.au/business/markets/dollars-rise-rate-hikes-take-toll-on-manufacturing-sector/story-e6frg926-1225981976575
