Australian manufacturing activity contracted at a faster rate in July as costs rise and the global economic slowdown takes its toll, a private survey shows.

The Australian Industry Group/PriceWaterhouseCoopers Australian Performance of Manufacturing Index (PMI) fell 6.9 index points to 40.3 in July.

Readings above 50 indicate an expansion in activity.

Falls in activity in July were largest in the paper, printing and publishing sector, as well as the textiles and basic metals sub-sectors.

PriceWaterhouseCoopers’ (PWC) partner for Economics and Policy Jeremy Thorpe said the July index was at a three-year low.

“Worryingly, the US, Japan, China and the euro zone are all simultaneously contracting and posting results below the benchmark reading of 50 points,” Mr Thorpe said in a statement accompanying the survey’s release.

“This demonstrates the weakness of the global economy and the continued softening of the Chinese economy.”

Australian Industry Group (Ai Group) chief executive Innes Willox said a variety of factors continued to be a drag on the local manufacturing industry.

“The industry is experiencing substantial pressures driven by the strong (Australian) dollar, cost increases, slow growth in domestic demand and competition from lower cost sources of production,” he said.

“Manufacturers are responding by re-assessing and re-modelling their businesses but, as suggested by another drop in new orders and with the full impact of the carbon tax still to be felt, further falls in overall activity are likely in the months ahead.”