Thursday, September 29, 2022
Australian manufacturers are operating at record capacity, but chronic labour shortages and spiralling material costs have cooled business’ forward sentiment and are constraining expectations of profitability, the latest ACCI-Westpac Survey of Industrial Trends shows.
Westpac senior economist Andrew Hanlan said that manufacturers are benefitting from a burst of demand associated with the reopening of the economy from the delta lockdowns of late year, as well as from fewer disruptions around COVID more generally and inclement weather.
“The Westpac-ACCI actual composite index – a gauge of business conditions – held in very strong territory, broadly unchanged at 64.6 in the September quarter, following a 64.5 in June.
“The upbeat reading was driven by an acceleration in manufacturing output and a flood of new orders, with both advancing to series highs and a little above the readings for 2018. However, a stalling of employment in the sector, after a strong rebound in June, held back the result.
“A net 45 per cent of respondents reported an increase in new orders in the September quarter. Manufacturers are benefitting from rising demand across consumers; business equipment investment; public infrastructure; as well as agriculture and the mining sector.
“Looking ahead to prospects for the December quarter, the survey suggests that the reopening effect will likely fade. The Expected Composite index moderated to 60.8 from 67.5, with the pace of growth for output and new orders cooling, albeit to still reasonably robust levels.
“The downside to this generally positive picture of rising new orders is that manufacturers are facing into gale force supply headwinds. Intense labour and material shortages are resulting in spiralling costs and constraining output growth.
“The survey indicates that there is a labour shortage crisis. A net 67.5 per cent of respondents indicated that labour was "harder to find", up from 51.7 per cent last quarter, the tightest conditions in the history of the series (dating back to 1974).
“Cost pressures remain acute, with a net 59 per cent of manufacturers reporting higher input costs. That is unchanged from the June quarter, at the highest reading since the high inflation days of 1985/86. The profit outlook deteriorated from a net 19 per cent to a subdued net 8 per cent, impacted by margin squeeze.
“As to the single factor most limiting production, a net 44 per cent of respondents cite labour, matching the series high of 1973, and a net 15 per cent of respondents cite materials, the highest since the global oil shock in 1973/74. ACCI chief of policy and advocacy David Alexander said with the reopening of the economy, manufacturers were facing persistent cost pressures.
“Businesses have bounced out of the COVID-era, with business investment strong, record numbers looking for staff, and capacity utilisation at record levels over the 56-year history of the survey.
“Input cost pressures are severe, and wage pressures are mounting.
“While business conditions are strong, forward sentiment over the next six months has cooled, reflecting a series of interest rate rises in recent months.
“With the Reserve Bank expected to continue to tighten monetary policy, there is a risk business conditions may weaken in the near-term. This may be further compounded by the turbulent outlook in the United States, China, and European economies.
“The task of the first budget of the Albanese government will be to build confidence that government finances are being put in order.
“Government policies can ease the capacity constraints facing business through policies that support business investment in automation and other advanced technologies.
“The government can also encourage workforce supply and participation through enhanced skills development, as well as measures such as childcare support and incentives for seniors to join the workforce,” Mr Alexander added.
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