The Australian Industry Group’s performance of manufacturing index remains above the 50 level separating expansion from contraction, lifting two points in February to 53.5.

That’s the highest level since July 2010 and the eighth consecutive month of growth.

Ai Group chief executive Innes Willox said production, sales, new orders and exports all lifted in the month, consolidating gains made over the second half of 2015.

“There is little doubt that greater competitiveness in export markets and in the domestic market due to the lower dollar is central to this turnaround,” he said.

And, with the Aussie set to remain at or about its current level, confidence is building, Willox said.

“Businesses are re-adjusting their strategies, giving a higher priority to domestic activities both internally and along their supply chains,” he said.

But big challenges remain as the sector is vulnerable to international turbulence and poor domestic policy changes.

Despite improving trends, the metal products and large machinery and equipment sub-sectors remain in contraction, Willox said.

“Many businesses are being adversely impacted by the higher costs of imported inputs associated with the lower dollar,” he said.

Willox said supply chains were also taking time to rebuild after the “hollowing out” that defined the extended period of weakness for the sector in recent years.

“The upcoming federal budget is an opportunity to add momentum to the recovery that is underway,” he said.

AAP