Middle East conflict reignites cost pressures in Australia’s manufacturing sector

Media Release: June 16 2026

Momentum in Australia's manufacturing sector stalled heading into mid-year, with conditions slipping back to neutral after a short-lived recovery.

After a brief stint of expansion over the last couple of quarters, the Westpac-ACCI Actual Composite eased to 50.5 in Q2, signalling that activity is now flat. 

“The main theme evident throughout the survey is a growing squeeze on both demand and costs. The Middle East conflict is compounding the inflation challenge that was already present earlier in the year, further compressing household incomes and spending. At the same time, rising input costs are intensifying margin pressure on manufacturers,” said Westpac Economist Ryan Wells.

Growth in new orders effectively evaporated in Q2, with only a net 1 per cent of respondents reporting an increase. Against a backdrop of cooling demand and an earlier build-up in inventories, production slowed considerably in Q2 with only a net 6 per cent of firms reporting an increase in output, down from a net 27 per cent in Q1.

“The Middle East conflict has reignited cost pressures across the industry, with a net 51 per cent of firms reporting a rise in average unit costs, the highest since Q3 2024. Pressures are particularly acute in sub-sectors with more direct exposure to fuel, fertiliser and other supply chain stresses, including food products, machinery and equipment, chemicals, wood and furniture,” commented Mr Wells.

To date, manufacturers are partially absorbing the increase in costs with a net 30 per cent of firms reporting higher selling prices during the quarter, lower than the share of firms reporting an increase in costs over the same period. This gap points to a squeeze on margins, which is consistent with the sharpest drop in profit expectations since the pandemic.

“Manufacturers expect cost pressures to remain acute in the period ahead, with a net 54 per cent anticipating a further rise over the next three months, the highest since the 2022 post-pandemic inflation shock. Firms expect further material increases in selling prices as a result, suggesting that some pass-through of higher costs will persist into the second half of the year,” said Mr Wells.

The Westpac-ACCI Expected Composite has moderated significantly, from a bullish 60.8 in Q1 to 52.3 in Q2, reflecting expectations for higher costs, subdued demand and slower growth in production. More broadly, manufacturing sentiment about the general business outlook has turned deeply pessimistic, with a net 21 per cent now anticipating a deterioration over the next six months versus a net 22 per cent anticipating an improvement in Q1.

“Heightened uncertainty, surging costs and a more downbeat outlook for demand has made manufacturers more cautious about the investment outlook and new hiring,” commented Mr. Wells.

On balance, a net 12 per cent of firms intend to increase plant and equipment spending over the next twelve months, while a net 1 per cent intend to reduce building investment, with the bulk of these moves driven by firms delaying or cancelling plans to increase investment. Additionally, a net 4 per cent of manufacturers reduced the size of their workforce in Q2, pointing to a more abrupt cooling in labour demand within the sector.

ACCI Chief Executive Officer Andrew McKellar said the survey suggests that the weakness in manufacturing is part of a broader slowdown in the economy, rather than a sector‑specific issue.

“The survey shows that the conflict in the Middle East is reinforcing a broader cost shock across the economy, with higher fuel, freight and input costs adding to pressure on businesses well beyond the manufacturing sector,” said Mr McKellar.

The slowdown in the economy began to appear in the March quarter National Accounts (GDP growth of just 0.3 per cent and GDP per capita down 0.1 per cent), with the survey signalling the economy will slow further in the June quarter. 

Business investment in the quarter was supported heavily by machinery and equipment investment linked to data centres, but the headline investment result does not appear to reflect broad‑based strength across the wider economy, the survey showing a marked decline in investment intentions in the manufacturing sector over the next six months. 

Mr McKellar said that while the Budget decision to make the instant asset write‑off permanent is a positive step, there remains concern that the broader policy mix does not do enough to encourage private sector investment, lift productivity and strengthen economic growth. 

“Of great concern to business are the proposed capital gains tax changes which will discourage productive investment in businesses," Mr McKellar said.

“The proposal of replacing the 50 per cent capital gains tax discount from 1 July 2027 with cost base indexation and a 30 per cent minimum tax on net capital gains will affect the sale of businesses, shares and other appreciating assets, and reduce incentives to start, grow, expand or transfer a business. 

“With productivity weak and growth slowing, there is a strong case for policy settings that reduce barriers to doing business and support investment, rather than increasing the tax burden on capital."

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