Growth in Australia’s manufacturing sector in the early months of 2022 came to an abrupt halt in May, due to supply constraints, labour shortages, rising prices and wage growth.

The Australian Industry Group performance of manufacturing index fell by 6.1 points to 52.4 points, just above to 50-point mark that separates expansion from contraction.

The decline in May followed three months of consistent acceleration.

“There are mixed messages about the immediate outlook with new orders continuing to rise, but with many manufacturers expressing concern about the prospects of sharp energy price rises in the months ahead,” Ai Group chief executive Innes Willox said on Wednesday.

“Manufacturers continue to report supply constraints and labour shortages as the leading sources of concern and they reported still higher input costs and a lift in wages growth in May.”

Economic growth numbers for the March quarter due later on Wednesday are expected to show the broader Australian economy suffered a marked slowdown, after a robust finish in 2021.

The impact of the COVID-19 Omicron variant and the flood disaster along the east coast of Australia are expected to have dampened activity in the first three months of 2022.

Economists expect the economy grew by around 0.7 per cent in the quarter, a slight improvement on what the market was predicting last week.

However, this would still leave the economy growing well short of the 3.4 per cent expansion seen in the December quarter when there was a rebound after the Delta variant lockdowns ended.

If economists are correct, the annual growth rate likely slowed to around three per cent compared with 4.2 per cent as of December.

“The year began with that absolute debacle over rapid testing, which led to all those supply chain issues and grocery shortages,” Treasurer Jim Chalmers told Sky News.

“But the economy more broadly has been softer than we would like and even since those national accounts, inflation has spiked, real wages have gone backwards further. There is no shortage of economic challenges.”

Economists upgraded their growth forecasts after data on Tuesday showed company profits, business inventories and government demand was stronger than expected in the quarter, on top of solid household spending reported earlier in the month.

As expected, net exports will detract from the growth calculation after strong imports during the quarter.

Data last week also showed disappointing results for construction and business investment.

Economists doubt a more modest expansion in the first three months of 2022 will stand in the way of the Reserve Bank of Australia raising the cash rate by a further 25 basis points when its’ board meets next week.

Barclays economists expect the cash rate to steadily rise to 1.75 per cent by the end of this year, compared with 0.35 per cent now, with a further hike to two per cent in the early stages of 2023.

Colin Brinsden, AAP Economics and Business Correspondent
(Australian Associated Press)