Australia's seasonally adjusted S&P Global Manufacturing Purchasing Managers' Index fell to 49.6 from 52 in August, slipping below the 50-threshold separating expansion from contraction, according to a Thursday report by S&P Global.

The decline marked the sharpest monthly fall in 21 months, driven by a fresh drop in new orders that pushed output lower during the month, the report added.

Both employment and purchasing activity were scaled back, while business confidence weakened and supply chain conditions deteriorated further, even as the pace of cost inflation eased, S&P added.

Survey respondents pointed to intense competition, rising prices, and weakening underlying demand behind the first decline in total new sales in three months, the report added.

The fall in new work prompted manufacturers to cut production at the fastest rate since December 2024, the report said.

Jingyi Pan, S&P Global Market Intelligence Economics associate director, said Australian goods producers continued to face heavy cost burdens despite softer inflation, alongside worsening supply conditions, leaving companies to navigate a difficult operating environment.