Manufacturing sector contracts in November

The tight labour market, supply chain turbulence and climbing energy prices have caught up with Australia's manufacturing sector, resulting in a contraction of activity.

Its performance slid in five of the six sectors sampled in the Australian Industry Group's manufacturing index, with building, wood and furniture products lifting a touch on an uptick in new orders.

But demand elsewhere was sluggish, with all other sectors reporting fewer new orders.

The textiles, clothing, footwear, paper and printing sector declined sharply, falling 24.3 points to 29.5 points, with higher input prices, higher interest rates and overseas competition challenges for the sector in November.

The overall index fell 4.9 points to 44.7, with a reading below 50 indicating a contraction in activity.

The slide in activity in November followed three months of flat conditions.

Ai Group boss Innes Willox said decaying national and global economic conditions were starting to weigh on demand for goods. 

"Manufacturing is at risk of being squeezed between deteriorating demand conditions and persistent supply side pressures," Mr Willox said.

He said the competitive labour market and supply chain disruptions had probably peaked but remained well above normal levels.

Rising energy prices were also worrying manufacturers. 

But for retailers, the festive season will likely buoy demand before cost of living pressures and ballooning mortgage repayments catch up with consumers in the new year.

After the Christmas boost wears off, Deloitte Access Economics analysts expect spending to pull back as is already occurring in other comparable nations, such as the UK and US.

The author of the retail forecasts report, David Rumbens, said Australia could even enter a mild "retail recession", with sales volumes anticipated to fall by 0.2 per cent in the March quarter and 0.4 per cent in the June quarter of 2023.

"The result could see the sector entering a short and shallow 'retail recession'," Mr Rumbens warned.

While many consumers have been content to eat into their savings rate to fund their spending, this is unlikely to continue long term. 

"Consumers will only be happy to dip into their savings for so long – some pullback in spending will need to come," the report stated.

But despite a few recent cracks in retail spending data, Mr Rumbens said the holiday spending was likely to keep retailers busy for the rest of 2022.

Growth in nominal retail sales in the 12 months to December is expected to grow by 10.4 per cent, the economists estimated. 

"But most of this is expected to be driven by prices, as retailers try to maintain their margins by passing on rising costs."

Retail prices are tipped to swell by 7.6 per cent in the year to December.

Understanding spending behaviour remains important for the Reserve Bank of Australia as it navigates its narrow path of hiking interest rates to tame inflation without overdoing it and triggering a recession.

The central bank board will meet next Tuesday to make its final cash rate decision for 2022.