The Australian Industry Group Australian Performance of Manufacturing Index (Australian PMI) fell 1.8 points to 49.5 in December, signalling the first mild contraction in manufacturing conditions in 26 months and the lowest result since August 2016.

The Australian PMI slipped below the critical 50-points threshold (that separates expansion from contraction) in December, bringing to an end a 26-month period of expansion – the longest since 2005. Six of the seven activity indexes in the Australian PMI fell in December, indicating generally weaker industry conditions.

“December 2018 saw the end of an extended period of manufacturing expansion after growth slowed in recent months,” said Ai Group Chief Executive Innes Willox. “The mild slowdown in manufacturing recorded in December adds to the picture of a softer closing quarter for 2018.

Five of the eight manufacturing sectors expanded in December (according to trend data), with growth led by the large food & beverages sector (down 0.7 points to 57.3). Respondents across the large metals (down 1.4 points to 47.7), machinery & equipment (down 0.6 points to 49.6) and chemicals (down 1.3 points to 49.7) sectors have reported a gradual slowing of demand throughout the second half of 2018.

“While the cornerstone food & beverage sector and the construction-related non-metallic mineral products sector both continued to expand, contractions in other large sectors – chemicals, metal products and machinery & equipment – dragged the Australian PMI fractionally into negative territory,” Willox continued.

The input prices index rose by 1.3 points to 76.3 in December, with energy-intensive sectors continuing to report problems with high gas and electricity prices. Meanwhile, the selling prices index fell into contraction (down 6.3 points to 44.1) for the first time since October 2017, indicating manufacturers have not been able to pass on their rising input costs to customers. After falling in the previous two months, the average wages index rebounded by 5.4 points to 64.2 in December, returning the index back above its historical average of 59.1.

“Production, exports and employment were all lower in the month while domestic sales were held up by discounting that saw a sharp drop in selling prices,” Willox added. “This, together with stronger wages growth and a lift in input prices, continued the squeeze on manufacturing margins.”