Manufacturing slowdown worsens The manufacturing sector is at its weakest in four years as the strong Australian dollar, rising labour costs and high energy prices continue to hit the industry, a private monthly measure has found. The latest data strengthens the case for an interest rate cut next Tuesday, after RBA figures that showed continued weakness in private sector credit growth were released yesterday. Financial markets are pricing in a 35 per cent chance of a rate cut, the highest expectation since the RBA's decision in February to keep rates at 3 per cent. The markets are also pricing in at least 50 basis points of cuts by the end of the year. The Australian Industry Group Australian Performance of Manufacturing Index for March dropped 7.7 points to 36.7, its lowest since May 2009 and the lowest export reading since exports were included in 2004. The food, beverage & tobacco products, printing & recorded media, non-metallic mineral products, metal products, and machinery & equipment sectors all registered significant contradictions. Ai Group's chief executive Innes Willox said the sharp drop was "deeply concerning." "The strength of the Australian dollar is a major burden on domestic producers and our rising unit labour costs and high energy prices are adding to pressures," Mr Willox said in a statement this morning. Together they are undermining competitiveness in both the local market and in export markets and they are proving a major barrier to inbound investment in domestic manufacturing facilities with Australia now ranking among the highest cost manufacturing centres internationally. Data released yesterday showed that private sector credit edged higher by 0.2 per cent in March, continuing a similar rise the month before and bringing growth over the past year to 3.2 per cent. The soft growth represented a "prolonged state of weakness" since the financial crisis, Westpac senior economist Andrew Hanlan said. Business credit remained flat after falling 0.2 per cent in February, and increased 2.6 per cent over the past year. Housing credit performed the strongest, rising 0.4 per cent last month after a 0.4 per cent increase in February. The tepid growth reflected continuing consumer and business caution about borrowing and spending, analysts said. At the same time, households and corporates maintained their preference for saving and stronger balance sheets. "All components of credit are showing no sign of accelerating out of the range they have been in for the past six months or so," Citi economists Paul Brennan and Josh Williamson said, adding that they expected a 25 basis points rate cut in May or June. Meanwhile, the National Australia Bank's quarterly ASX 300 business survey found conditions remained stable last month, in contrast to a minus-7 reading on NAB's wider quarterly business survey. While the finance, business and property sector strengthened, retail and manufacturing weakened, the survey found. A separate survey by credit data research group Veda released on Wednesday found that business credit demand slowed for the second consecutive quarter, the first time since 2010. Rate cut expectations were bolstered by a lower-than-expected inflation rate in the first three months of the year and the highest unemployment rate since 2009 in March. JPMorgan economist Ben Jarman said the Reserve was more likely to consider a rate cut at its June meeting after the release of April employment figures next Thursday and private capital expenditure expectation numbers on May 30.