Australia's manufacturing sector contracted in March following a decline in new orders, employment, and purchasing activity due to the effects of the war in Iran.

The S&P Global Australia Manufacturing Purchasing Managers' Index contracted to 49.8 in March, below the 50-point mark that separates growth and contraction, the first shrinkage since October.

In February, the indicator was in expansionary territory at 51.

The decline indicated a "marginal deterioration in business conditions," S&P Global said.

New orders slid in March, ending a four-month streak of growth, due to tamed customer demand and lower market confidence.

"Customer demand also waned, despite a sustained expansion in new export orders. It remains to be seen how long international demand will be able to hold up given the wider environment," S&P Global Market Intelligence economics director Andrew Harker said.

New orders shrank for the second straight month and to the largest extent since August 2020, S&P said.

Employment declined for the first time in five months and saw the sharpest decrease since October 2024, due to lower workloads, expense considerations, and difficulties with hiring, according to S&P.

"The Australian manufacturing sector suffered some of the effects of the war in the Middle East in March, most notably an intensification of inflationary pressures and disruption to supply chains," Harker said in a note.

Manufacturer confidence plunged to the lowest level in 20 months due to concerns about the impact of the war.

"Whether the sector can resume growth in the second quarter will in large part depend on how long the war in the Middle East persists," Harker said.

Despite the gloomy outlook, new export orders surged the fastest since May 2021, S&P Global said.

Australia is poised to receive a multi-billion-dollar jackpot from the Iran war due to higher coal and gas export prices, according to a Westpac (ASX:WBC, NZE:WBC) report Tuesday.