Manufacturing activity continued softened in December with few signs of any pick up according to the latest seasonally adjusted Australian Industry Group - PwC Australian Performance of Manufacturing Index. The data fell 1.3 points to 46.3, still below the 50 point level separating expansion from contraction.

Manufacturers cited weakening domestic demand together with the strong Australian dollar and higher interest rates as negatively impacting on growth in the month. Nine out of the 12 sub-sectors recorded declines in activity including clothing & footwear, textiles and wood products & furniture.

Australian Industry Group chief executive Heather Ridout said the December data points to the manufacturing sector losing ground and showing few signs of upturn.

"The continuation of flat conditions in the sector reflects accumulating structural pressures mounting on the industry along with other trade-exposed sectors in the wake of the mining boom," she said.

"These pressures look set to continue due to the strength of commodity prices and the levels of investment we are seeing in the mining sector. These forces are pushing up the level of the dollar and expectations about the directions of interest rates and inflation. These structural pressures need to be at the centre of policy attention as we, as a nation, grapple with the risks of becoming an unbalanced and insufficiently diversified economy into the future."

Although the manufacturing sector started 2010 with conditions improving strongly, since around March the sector saw first a slowing pace of growth and, over the closing four months of the year, falls in levels of activity.

PwC Global Head of Industrial Manufacturing, Graeme Billings, said: "In the face of these declines in activity and the continuing slump in new orders, it is imperative that businesses continue to search for efficiencies, improvements and innovative approaches to their markets, products and business models."