The Ai Group Industry Index (AIGII) for December 2025 registers at -12.50, a modest deterioration from November’s -11.20 but better than the consensus estimate of -15.00. This index, sourced from the Sigmanomics database, measures manufacturing sector sentiment and activity across Australia. The reading remains negative, indicating contraction, but the pace of decline is less severe than earlier in the year.

Drivers this month

• Supply chain delays eased slightly, contributing 0.80 points to the index.
• Input cost pressures remain elevated, subtracting -1.50 points.
• Export orders held steady, supporting a neutral impact.
• Domestic demand softened amid higher borrowing costs, subtracting -0.60 points.

Policy pulse

The Reserve Bank of Australia’s (RBA) recent 25 basis point hike in November has tightened financial conditions, reflected in subdued domestic demand. Inflation remains above the 2-3% target band, prompting expectations of further rate increases in early 2026. The Ai Group Index’s contraction aligns with this cautious monetary stance.

Market lens

Immediate reaction: The Australian dollar (AUDUSD) weakened 0.30% within the first hour post-release, reflecting investor caution. Short-term bond yields rose modestly, pricing in persistent inflation risks and slower manufacturing growth.

Core macroeconomic indicators provide context for the Ai Group Industry Index’s trajectory. Australia’s GDP growth slowed to an annualized 1.80% in Q3 2025, down from 2.30% in Q2. Unemployment remains low at 3.90%, but wage growth has moderated to 3.20% YoY, insufficient to offset inflation running near 4.50%. Business investment contracted 1.10% in Q3, reflecting cautious corporate sentiment amid tighter credit conditions.

Monetary Policy & Financial Conditions

The RBA’s tightening cycle, now totaling 125 basis points since mid-2025, has increased borrowing costs. The cash rate stands at 4.25%. Credit growth slowed to 3.50% YoY, down from 5.10% six months ago. Financial conditions indices show a tightening trend, pressuring manufacturing firms reliant on working capital.

Fiscal Policy & Government Budget

The Australian government’s fiscal stance remains mildly expansionary, with a 2025-26 budget deficit forecast at 1.80% of GDP. Targeted infrastructure spending and tax incentives for manufacturing innovation aim to support the sector. However, fiscal stimulus is constrained by rising debt servicing costs amid higher interest rates.

External Shocks & Geopolitical Risks

Global supply chain disruptions persist due to ongoing geopolitical tensions in the Indo-Pacific region. Trade frictions with key partners, including China and the US, have led to tariff uncertainties. Commodity price volatility, especially in metals and energy, adds cost pressures for manufacturers.

Drivers this month

• Improved logistics and shipping timelines contributed 0.70 points.
• Rising input costs and energy prices subtracted -1.80 points.
• Stable export demand neutralized further declines.

Policy pulse

The index remains below zero, consistent with a manufacturing sector under pressure from monetary tightening and inflation. The RBA’s forward guidance suggests further rate hikes, which could dampen activity unless inflation eases.

Market lens

Immediate reaction: Australian 2-year government bond yields rose 5 basis points post-release, reflecting increased risk premiums. The AUDUSD currency pair weakened, consistent with cautious investor sentiment.

Looking ahead, the Ai Group Industry Index points to a cautious base case scenario for Australian manufacturing. Continued monetary tightening and global uncertainties pose downside risks, while easing inflation and fiscal support offer upside potential.

Scenario analysis

• Bullish (25% probability): Inflation moderates faster than expected, allowing the RBA to pause hikes by mid-2026. Supply chains normalize, boosting manufacturing output and pushing the index above -5.
• Base (50% probability): Inflation remains sticky, prompting gradual rate increases. Manufacturing contracts mildly with the index hovering between -10 and -15 through 2026.
• Bearish (25% probability): Geopolitical tensions escalate, disrupting trade and supply chains further. Inflation spikes again, forcing aggressive monetary tightening and pushing the index below -20.

Structural & Long-Run Trends

Long-term, Australian manufacturing faces structural shifts toward automation, sustainability, and high-value production. Government incentives for innovation and digital transformation could enhance competitiveness. However, global competition and climate policy compliance remain challenges.

The December 2025 Ai Group Industry Index reading of -12.50 reflects a manufacturing sector cautiously navigating a complex macroeconomic environment. While contraction persists, the pace has moderated from earlier in the year. Monetary policy tightening, inflation pressures, and geopolitical risks remain key headwinds. However, fiscal support and improving supply chains provide some relief. Market participants should watch inflation trends and global trade developments closely, as these will shape the sector’s trajectory in 2026.

Key Markets Likely to React to Ai Group Industry Index

The Ai Group Industry Index is a critical gauge of Australia’s manufacturing health, influencing equity, currency, and bond markets. Stocks in the industrial and materials sectors often track the index closely, while the AUD/USD currency pair reacts to shifts in economic sentiment and monetary policy expectations. Bond yields adjust to inflation and growth outlooks signaled by the index.

• ASX200 – Australian equities sensitive to manufacturing sector performance.
• AUDUSD – Currency pair reflecting trade and monetary policy impacts.
• BHP – Major mining stock linked to industrial demand.
• AUDJPY – Reflects risk sentiment and carry trade flows.
• BTCUSD – Crypto market sentiment sometimes correlates with risk appetite shifts.

Insight Box: Ai Group Industry Index vs. ASX200 Since 2020

Since 2020, the Ai Group Industry Index and the ASX200 have shown a positive correlation, particularly during periods of economic stress. For example, the sharp contraction in the index during early 2025 coincided with a 7% decline in the ASX200. Conversely, improvements in the index have often preceded rebounds in the equity market, underscoring its value as a leading indicator for Australian industrial equities.

FAQ

What is the Ai Group Industry Index?

The Ai Group Industry Index measures manufacturing sector sentiment and activity in Australia, reflecting business conditions and outlook.

How does the Ai Group Industry Index impact the Australian economy?

The index signals manufacturing health, influencing GDP growth expectations, employment, and investment decisions.

Why is the Ai Group Industry Index important for investors?

It provides early insights into industrial sector trends, helping investors anticipate market movements and policy shifts.

Key takeaway: The Ai Group Industry Index’s December 2025 reading signals a manufacturing sector stabilizing amid persistent challenges, with cautious optimism hinging on inflation and geopolitical developments.

This has been drafted with AI assistance and then thoroughly reviewed, refined, and approved by our human editorial team to ensure accuracy, and originality.

Updated 12/2/25