The Ai Group Manufacturing Index (AIGMI) for Australia registered -18.00 in December 2025, improving from -22.00 in November. This index, sourced from the Sigmanomics database, measures manufacturing sector sentiment and activity, with negative values indicating contraction. The latest reading suggests a moderate easing in the sector’s downturn but still reflects ongoing challenges.

Geographic & Temporal Scope

The index covers the Australian manufacturing sector nationwide, capturing data monthly. December’s reading is the latest in a series dating back over a year, allowing for robust temporal comparisons. The 12-month average stands at -21.30, highlighting that current conditions remain below historical norms.

Core Macroeconomic Indicators

Manufacturing contraction aligns with broader macroeconomic trends, including a 3.50% YoY GDP growth slowdown and a 5.10% unemployment rate as of November 2025. Inflation remains elevated at 4.20%, prompting cautious consumer spending and investment. Industrial production and capacity utilization rates have also softened, consistent with the index’s negative readings.

Monetary Policy & Financial Conditions

The Reserve Bank of Australia (RBA) has maintained a tight monetary stance, with the cash rate steady at 4.10% since October 2025. Financial conditions remain restrictive, with credit growth slowing to 2.30% YoY. The manufacturing sector is sensitive to these conditions, as borrowing costs impact capital expenditure and inventory management.

Fiscal Policy & Government Budget

Fiscal policy has been moderately expansionary, with the 2025-26 budget allocating AUD 3.20 billion toward manufacturing innovation and green technology grants. This support aims to offset some headwinds from global demand shocks and supply chain issues. However, overall government spending growth has slowed to 1.80% YoY, limiting stimulus impact.

External Shocks & Geopolitical Risks

Global uncertainties persist, notably from China’s manufacturing slowdown and ongoing trade tensions in the Indo-Pacific region. Commodity price volatility, especially in iron ore and coal, has pressured input costs. These external shocks contribute to the sector’s cautious outlook and subdued investment appetite.

Financial Markets & Sentiment

Following the index release, the AUD/USD currency pair rose modestly by 0.15%, reflecting relief at the less severe contraction. Australian equities, particularly industrial stocks, showed mixed reactions. The 2-year government bond yield edged down 5 basis points, signaling some easing in market inflation expectations.

Structural & Long-Run Trends

Long-term trends in Australian manufacturing include increased automation, digitalization, and a shift toward sustainable production. These structural changes are gradually improving productivity but require upfront investment, which remains constrained under current financial conditions.

Drivers this month

• New orders improved by 3.50 points, reflecting cautious demand recovery.
• Production rose 2.80 points, supported by easing supply chain delays.
• Employment index remained flat at -15, indicating ongoing labor market softness.
• Supplier deliveries index stayed negative at -20, reflecting persistent logistics challenges.

Policy pulse

The index remains below the RBA’s neutral zone, consistent with ongoing restrictive monetary policy aimed at curbing inflation. The reading suggests that manufacturing contraction is moderating but not yet reversing, aligning with the central bank’s inflation target horizon.

Market lens

Immediate reaction: AUD/USD appreciated 0.15% within the first hour post-release, while 2-year government bond yields declined by 5 basis points, signaling a mild easing in inflation expectations and risk sentiment.

Forward Outlook

Looking ahead, the Ai Group Manufacturing Index is likely to remain in negative territory through Q1 2026, with three scenarios shaping the outlook:

• Bullish (25% probability): Global demand recovers faster than expected, supply chains normalize, and fiscal stimulus boosts investment, lifting the index above -10 by mid-2026.
• Base (50% probability): Gradual improvement continues, with the index hovering between -15 and -18 as monetary policy remains tight and external risks persist.
• Bearish (25% probability): Prolonged global slowdown and renewed geopolitical tensions deepen contraction, pushing the index below -25 again.

Risks and Opportunities

Downside risks include a sharper-than-expected slowdown in China, commodity price shocks, and tighter credit conditions. Upside opportunities stem from government support for green manufacturing and potential easing of inflation pressures allowing monetary policy relaxation.

Closing Thoughts

The December 2025 Ai Group Manufacturing Index signals a tentative easing in Australia’s manufacturing contraction. While the sector remains challenged by monetary tightening, external shocks, and structural shifts, fiscal support and improving supply chains offer some relief. Market reactions suggest cautious optimism, but the path to recovery depends heavily on global demand and domestic policy calibration. Investors and policymakers should monitor this index closely as a barometer of industrial health and economic momentum.

Since 2020, the Ai Group Manufacturing Index and BHP stock price have shown a positive correlation, with manufacturing sentiment often preceding shifts in BHP’s share price. Periods of manufacturing contraction coincide with weaker commodity demand, pressuring BHP. Conversely, rebounds in the index tend to align with BHP rallies, reflecting improved industrial activity and commodity consumption.

Year	Avg AIGMI	BHP Annual Return (%)
2020	-15.20	-8.50
2021	-5.80	22.30
2022	-18.90	-12.10
2023	-12.40	9.70
2024	-20.10	-5.40
2025	-21.30	-3.20