Manufacturing sector expands strongly in June.

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1 July 2018 Manufacturing sector expands strongly in June. Key findings Growth momentum in the Australian manufacturing sector picked up at the end of the second quarter. Demand improved at a sharp pace, prompting firms to raise employment and boost production. Furthermore, favourable operating conditions led to a strengthening of business confidence. At the same time, capacity pressures were evidenced by lengthening input delivery times and increased backlogs of work. Commonwealth Bank Manufacturing PMI May 2016 June 2018 ( = no change on previous month) The headline index from the survey, the seasonally adjusted Commonwealth Bank Manufacturing Purchasing Managers Index TM (PMI ) a composite indicator designed to measure the performance of the manufacturing economy rose to.0 in June, up from 53.2 in May, to signal a strong and faster pace of improvement in the Australian goods-producing sector. Growth has been recorded in each month since data collection began in May Summary PMI Interpretation Jun-18.0 Expansion, faster rate of growth May Expansion, slower rate of growth A sharp expansion in new orders was observed in June, with almost one-third of the survey panel recording greater new sales. New contract wins and improved demand from abroad were among the reasons cited for growth of order books. Exports expanded at a similarlymarked rate that was the quickest in four months. New business from Asian markets, particularly China, Indonesia and the Philippines were noted by panellists. Buoyed by these trends in demand, future output expectations were strongly positive in June. Amid robust sales, production was raised. That said, although the rate of increase quickened and was strong, it remained below its average. To cope with higher workloads, additional staff were hired to boost operating capacities. Nonetheless, output capabilities were tested, as evidenced by the quickest rise in backlogs of work since January. Capacity issues across the supply chain were also apparent, with average input delivery times lengthening to the greatest extent in five months. Worsening vendor performance was attributed to material shortages and strong input demand. Panellists indicated that suppliers raised input prices further during June, with commodity prices, in particular metals, driving up cost burdens. The rate of inflation was sharp and only slightly weaker than May s survey high. Strong demand enabled firms to share greater operating expenses with their clients, with output prices rising sharply by historical standards.

2 Output Index Q. Please compare your production/output this month with the situation one month ago. Australian manufacturers raised output at the end of the second quarter, thereby sustaining a trend which has been apparent since data collection began in May The pace of expansion was solid, quickening on that seen in the previous month. According to anecdotal evidence, greater order book volumes supported the increase in production. ( = 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. New orders at Australian goods producers rose markedly during June, with around one-third of panellists reporting higher inflows of new work. Improved demand was attributed to new contract wins and stronger sales to foreign markets. That said, although the rate of growth accelerated from May s eight-month low, it remained below the series average. ( = 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. Australian manufacturers recorded greater sales to overseas clients during June, as signalled by the New Export Orders Index posting above the.0 no-change mark. The rate of expansion was strong overall and among the sharpest seen over the 26-month survey history. The latest upturn in foreign demand was generally associated with increased new business from Asian markets, such as China, the Philippines and Indonesia. ( = 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. Outstanding business rose during June, thereby reversing the modest contraction observed in the previous month. Backlogs of work have increased in all but four of the 26 months of data collection. The rise in capacity pressures was primarily linked to improved client demand. The rate of accumulation in unfinished work, albeit only moderate, was the fastest in five months. ( = 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. Having adjusted for seasonality, the Stocks of Finished Goods Index posted below the neutral.0 mark in June, to indicate a fall in postproduction inventories at Australian manufacturers. Some survey respondents noted that stocks were reduced to alleviate production line pressures. That said, the rate of depletion was only slight. ( = 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. With inflows of new business increasing strongly, Australian goods producers enhanced production capabilities in June by recruiting extra staff. The rate of job creation quickened on that seen in May to a solid pace. Furthermore, employment has been raised in each of the past 22 successive survey periods. Around 18% of panellists pointed to higher workforces, compared to 9% that noted a fall. ( = 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. Average prices charged by Australian manufacturing firms continued to rise in June, extending the current bout of inflation to 20 months. Although the rate of increase eased from the survey peak observed in May, it remained relatively sharp overall. A combination of strong demand and rising input costs motivated the latest month of output price hikes, according to monitored producers. 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. In line with the trend seen in for charges, input prices increased to a softer extent at the end of the second quarter. Similarly, the overall rate of inflation remained close to the survey-record seen in the previous month. According to panellists, cost burdens were lifted by rising commodity prices, particularly metals. % breakdown for June May 2016 Jun 2018 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. Another month of deteriorating vendor performance was faced by Australian goods producers during June. In fact, supply chain pressures mounted to the sharpest extent since January. The marked lengthening of average lead times was generally linked to material shortages, stronger input demand and capacity issues at suppliers. 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. The seasonally adjusted Quantity of Purchases Index recorded above the.0 no-change threshold in June, thereby signalling a rise in buying activity across the Australian manufacturing sector. Panellists suggested that additional materials were purchased to accommodate for the rise in new orders. Furthermore, the rate of expansion was solid overall and accelerated from May s 21-month low. ( = 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. Holdings of raw materials and semi-manufactured goods rose at the end of the second quarter, extending the current sequence of expansion to two years. Some panellists noted that input stocks were increased in line with higher production requirements, while others raised pre-production inventories in anticipation of further rises in input prices. ( = 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? Business expectations towards future output remained strongly positive during June. In fact, the degree of confidence strengthened to a four-month high, with precisely 68% of the survey panel anticipating higher production over the coming 12 months. Increased marketing, planned new product launches and expansions into new markets were all cited as reasons to be confident. 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 Joe Hayes Economist Telephone joseph.hayes@ihsmarkit.com 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.