Manufacturing activity still contracted albeit at a slower pace in October, amid persistent pressure from a strong Australian currency and sluggish domestic demand, a survey has found.

The seasonally adjusted Australian Industry Group-PricewaterhouseCoopers Performance of Manufacturing Index (PMI) rose 2.1 points to 49.4, remaining just below the critical 50-point level separating expansion from contraction. Manufacturers again cited the strong Australian dollar and sluggish domestic demand as having an impact on growth.

A strong rebound in activity across clothing & footwear and machinery & equipment was not enough to offset the steep decline in the textiles sub-sector, which was largely related to weak consumer confidence and a shortage of skilled labour. Food & beverages and wood products & furniture also remained in the red. Across manufacturing, production levels and employment rose in October.

Australian Industry Group Chief Executive, Heather Ridout, said: "Manufacturers continue to be inhibited by strong overseas competition amid the strengthening Australian dollar, soft domestic demand and an intensification of skill shortages. While not confined to the west, skill shortages are particularly acute among Western Australian manufacturers. The industry also remains wary of the impact of interest rate rises at a time when strong competitive pressures are ensuring that inflationary pressures remain moderate," Mrs Ridout said.

PwC Global Head of Industrial Manufacturing, Graeme Billings, said: "The manufacturing sector continues to be weighed down by intense overseas competition, and this will be exacerbated by the strong Australian dollar. These circumstances present substantial challenges for manufacturers who must continue to search for business efficiencies and innovation opportunities.

"There are, however, reasons to be cautiously optimistic about the near term prospects of the sector. Production in the clothing & footwear; construction materials; and machinery & equipment sub-sectors rose strongly in October despite the overall fall in new orders, suggesting that businesses expect a pick-up in demand over the coming months," Mr Billings said.