Manufacturing conditions improve solidly in. December. Commonwealth Bank Manufacturing PMI Purchasing Managers Index TM Report.

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1 January 2019 Manufacturing conditions improve solidly in December. Key findings Australia s manufacturing sector rounded off 2018 on a solid note, with business conditions improving at a strong pace in December. Growth of both production and sales remained robust, while firms continued to add headcounts to keep on top of additional workloads. Notably, inflationary pressures eased amid reports of lower oil prices. Business confidence remained generally upbeat, despite slipping further. Commonwealth Bank Manufacturing PMI May 2016 Dec 2018 ( = no change on previous month) The headline index from the survey, the seasonally adjusted Commonwealth Bank Manufacturing Purchasing Managers Index (PMI ) dipped to 54.0 in December, from 54.6 in November, indicating another solid improvement in the health of the Australian goods producing sector. The latest reading contributed to a strong quarterly average that was the highest since the second quarter. The headline PMI is a single-figure composite indicator derived from questions on output, new orders, employment, input inventories and delivery times, and designed to provide a quick snapshot of the performance Summary of the manufacturing economy. PMI Interpretation Dec Expansion, slower rate of growth Nov Expansion, faster rate of growth Driving the upturn was a continued expansion in overall new orders, reflecting robust demand conditions. International markets also supported sales, with export orders rising for a sixteenth straight month. Anecdotal evidence pointed to greater demand from the United States and New Zealand. To accommodate for higher order books, firms maintained a strong rate of output expansion. Efforts to build-up stocks had also driven production volumes. Supporting greater production was a further increase in input purchasing. Though softer than in the previous two months, the expansion remained solid overall. Some panel members indicated that higher order inflows underpinned greater purchasing activity. Increased acquisitions of raw materials and semi-manufactured goods in turn boosted input inventories, which accumulated at a robust pace in December. Distributors remained unable to keep up with the sustained uptick in input demand, as indicated by another lengthening in delivery times in December. Shipping delays and material shortages related to Chinese environmental laws weighed on suppliers ability to fulfill deliveries. Meanwhile, capacity pressures were also evident among manufacturers despite further staff expansions. Backlogs accumulated for a fifth month running. The survey also brought signs of easing inflationary pressures, with reports of lower global oil prices. Input costs rose at the weakest pace for nearly a year, prompting firms to raise prices only modestly. Finally, business confidence remained elevated, but slipped to the lowest in two-and-a-half years amid some concerns over the housing market.

2 Output Index Q. Please compare your production/output this month with the situation one month ago. Australian manufacturing output expanded further at the end of the year, maintaining the unbroken run of growth observed since the survey began in May According to anecdotal evidence, higher client demand and efforts to replenish stocks underpinned increased production. While the latest pace of increase remained solid and similar to recent months, it was below its historical average. ( = no change on previous month) New Orders Index Q. Please compare the state of your new orders (in units) this month with one month ago. Demand for Australian manufactured goods continued to rise during December, as has been the case in each month throughout the survey history. While the pace of growth slipped from November, it remained solid overall. Panel members pointed to several reasons for increased orders, including firmer demand conditions and higher overseas orders. ( = no change on previous month) New Export Orders Index Q. Please compare the state of your new export orders (in units) this month with one month ago. Survey data indicated a further expansion in new export orders in December. There were reports of increased demand from the US and New Zealand. While robust, the rate of growth softened from midquarter and was below the average seen in the survey s over twoand-a-half-year history. Some firms that reported lower export sales highlighted customs delays and factory shutdowns. ( = no change on previous month) Backlogs of Work Index Q. Please compare the level of outstanding business in your company this month with one month ago. December data showed a further accumulation in workloads across the Australian manufacturing sector. The latest rise in unfinished work was the fifth in as many months. Furthermore, the pace of increase accelerated to a three-month high and was solid overall. Increased projects and greater client demand were the key reasons contributing to higher backlogs. ( = no change on previous month)

3 Stocks of Finished Goods Index Q. Please compare your stocks of finished goods (in units) this month with the situation one month ago. Holdings of finished goods in Australia s manufacturing economy increased for a fourth consecutive month in the latest survey period. The rate of accumulation accelerated from November, but remained modest overall. Survey panellists often mentioned higher sales forecasts, efforts to build-up stocks and greater order volumes as reasons for increased inventories. ( = no change on previous month) Employment Index Q. Please compare the level of employment at your unit this month with the situation one month ago. Factory employment expanded again at the end of the fourth quarter, continuing the growth trend apparent since September Higher production requirements and efforts to boost operating capacities were factors behind greater hiring. However, the pace of increase eased from November and was modest overall. ( = no change on previous month) Output Prices Index Q. Please compare the average price that you charge per unit of output (volume weighted) this month with the situation one month ago. Prices charged for Australian goods rose further at the end of the year. However, inflation moderated for a fourth consecutive month, in line with a slower rise in input costs, and reached the weakest in a year. Several factors contributed to higher output charges, including greater raw material costs, price hikes from suppliers and a weaker exchange rate. Some firms offered discounts, citing lower wool prices. Increasing rate of inflation Increasing rate of deflation ( = no change on previous month) Input Prices Index Q. Please compare the average price of your purchases (volume weighted) this month with the situation one month ago. Higher cost burdens were reported by Australian goods producers during the latest survey period. While solid, input price inflation was notably slower than in November, and the weakest since January. Cost increases were mostly linked to higher commodity prices (particularly grain and steel), drought-related supply shortages and a weaker Australian dollar. The upturn was curbed by lower energy prices. Increasing rate of inflation Increasing rate of deflation ( = no change on previous month)

4 Suppliers Delivery Times Index Q. Please compare your suppliers delivery times (volume weighted) this month with one month ago. Stretched supply chains across Australia s manufacturing economy continued to be reported at the end of the year. The deterioration in vendor performance remained steep, but was softer than that seen in the first half of Material shortages connected to China s environmental regulations, freight delays and greater demand all contributed to longer average lead times. Faster % Faster % Same % Slower ( = no change on previous month) 40 Slower Quantity of Purchases Index Q. Please compare the quantity of items purchased (in units) this month with the situation one month ago. December saw greater purchasing activity among Australian goods producers, continuing a trend that has been recorded since the survey began in May The rate of growth slowed slightly from the previous month, but was still solid overall. Panel members generally mentioned higher sales and increased production volumes as reasons for the rise in input purchases. ( = no change on previous month) Stocks of Purchases Index Q. Please compare your stocks of purchases (in units) this month with the situation one month ago. Survey data pointed to further growth of stocks of purchases during December, stretching the current sequence of accumulation to two-and-a-half years. The expansion of input inventories picked up slightly to a solid pace. Greater purchasing activity, efforts to build-up stocks and higher client demand boosted stock levels, according to anecdotal evidence. ( = no change on previous month) Future Output Index Q. In 12 months time do you expect the overall volume of output to be higher, the same or lower than now? For a fifth month in a row, business confidence among Australian manufacturers weakened during December. While optimism remained elevated, with half of the panellists anticipating higher output in the year ahead, the Future Output Index was at its second-lowest mark in the survey history. Concerns over the housing market weighed on expectations, while general optimism was linked to planned capital investment, new client wins and higher sales forecasts. Increasing rate of optimism Increasing rate of pessimism ( = no change over next 12 months)

5 For further information, please contact: Commonwealth Bank of Australia Daniel Ferguson Group Corporate Affairs Institutional and Business Banking Telephone media@cba.com.au IHS Markit Bernard Aw Principal Economist Telephone bernard.aw@ihsmarkit.com Jerrine Chia Marketing and Communications Telephone jerrine.chia@ihsmarkit.com About Commonwealth Bank Manufacturing PMI and the The Commonwealth Bank has commissioned IHS Markit to conduct research and provide insights for this edition of the Commonwealth Bank Manufacturing PMI through the Purchasing Managers Index Report. The Commonwealth Bank Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to a representative panel of purchasing executives in over 400 private sector manufacturing firms in Australia. The panel is stratified by GDP and company workforce size. The manufacturing sector is divided into the following nine broad categories: Food & Drink, Textiles & Clothing, Wood & Paper, Chemicals, Plastics & Rubber, Metals & Metal Products, Electronic & Electrical Equipment, Machinery & Equipment, Transport Equipment and Other Manufacturing. About PMI by IHS Markit The intellectual property rights to the Commonwealth Bank Manufacturing PMI provided herein are owned by or licensed to IHS Markit. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without IHS Markit s prior consent. IHS Markit shall not have any liability, duty or obligation for or relating to the content or information ( data ) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon. In no event shall IHS Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers Index TM and PMI are either registered trade marks of Markit Economics Limited or licensed to Markit Economics Limited. Commonwealth Bank use the above marks under license. IHS Markit is a registered trademark of IHS Markit Ltd. Things you should know This report is published solely for information purposes. As this report has been prepared without considering your objectives, financial situation or needs, you should before acting on the information in this report, consider its appropriateness to your circumstances and if necessary seek the appropriate professional advice. The information in this report and any opinions, conclusions or recommendations are reasonably held or made, based on the information available at the time of its publication. No guarantee is provided as to the accuracy, reliability or completeness of any statement made in this report. Commonwealth Bank of Australia ABN AFSL and Australian credit license 2349.