Australia's manufacturing activity improved in February as new orders grew for the first time in 27 months.

The headline seasonally adjusted S&P Global Australia Manufacturing Purchasing Manager's Index or PMI rose 50.4 from 50.2 in January, according to Monday data published by S&P Global.

A reading of above 50 is a sign of the manufacturing sector's expansion.

The PMI growth was buoyed on the growth of new orders, but production dropped in the same month as manufacturers have sufficient finished goods holdings. Backlogged orders also dropped concurrently.

"While current production fell in February, this is largely a reflection of continued excess capacity in the early stages of demand recovery," S&P Global Market Intelligence's economics associate director, Jingyi Pan, "This is likewise the reason for a marginal decline in employment levels and a sustained downturn in purchasing activity. It will be important to see further increase in new sales to help drive future output and employment growth in the goods producing sector."

Despite rising costs, business sentiment climbed to its highest since April 2022, as firms are expecting that production will be bolstered by greater marketing efforts and better economic conditions in the next 12 months, S&P Global said.