Manufacturing outlook sours as cost crisis continues

Industry sentiment is darkening as local manufacturing stalls amid a broader economic slowdown and an ongoing cost crisis, the latest ACCI-Westpac Industrial Trends Survey has found.

Westpac chief economist Bill Evans said that the manufacturing sector is experiencing a damaging slowdown in activity. This is being compounded by elevated costs and persistent headwinds from the availability of labour and materials.

Margins are being squeezed with only a partial pass-through of spiralling input costs to manufacturers’ prices. Despite the highest proportion of firms since 1988 lifting their prices to protect margins, selling price increases continue to trail the surge in average costs.

“The Westpac-ACCI Actual Composite weakened in the latest survey, down from 53.9 in March to 50.7 in June.

“A reading around the break-even mark of 50 indicates that conditions within the manufacturing sector are stalling. The survey reported broadly flat new orders and employment, a decline in overtime and a slowing in output growth.

“The fading of earlier tailwinds and rising interest rates are contributing to a downbeat outlook for demand, while labour shortages and cost pressures persist.”

“The Expected Composite rose slightly to 52.6 in June, but follows 51.2 in March, which was the softest reading since 2014, outside of the pandemic-era lows during 2020.

“Notably, the general business mood has become extremely pessimistic with a net 32 per cent of respondents now expecting the business situation to worsen over the next six months. That eclipses the lows seen during the pandemic and is the weakest reading since the Global Financial Crisis.

“Businesses report that the economic outlook remains bleak, as interest rates continue to rise; high inflation reduces real household incomes and margins are squeezed. Conditions in the manufacturing sector are likely to deteriorate further over the period ahead.

“The bounce in new orders in March proved to be temporary, with a net 1 per cent of respondents reporting a decline in June, as demand stalls. Expectations remain subdued, with only a net 7 per cent of respondents anticipating a rise next quarter, down from an average of 34 per cent over 2021 and 2022.

“The survey reports there has been barely any let-up in the cost crisis facing manufacturers. This extended period of elevated costs, associated with labour and material shortages, and surging energy costs, must be threatening the viability of some businesses.

“Labour shortages remain intense but have eased somewhat over recent quarters. A net 50.8 per cent of respondents indicated that labour was “harder to find”, still very elevated but down from the series high of 65.8 per cent last September.

“Despite the bleak assessment, manufacturers remain intent on lifting investment. A net 29 per cent plan to increase spending on equipment. That is broadly in line with the highs seen when Australia was first emerging from COVID lockdowns. While this promises to address some of the pressures around capacity and rising labour costs, plans may go on hold if conditions deteriorate further.

ACCI chief of policy and advocacy, David Alexander, cautioned that manufacturers’ viability would be tested in the coming months as significant headwinds constrained profitability.

“The survey makes clear that there is little respite for local industry as profit margins continue to be squeezed tighter and tighter,” Mr Alexander said.

“Manufacturers are by no means immune from the cost pressures that are also battering Australian households – two thirds of firms experienced increasing material costs in the last quarter. At the same time almost 50 per cent of firms expect their wages bill to rise by the end of 2023.

“Profit expectations have plummeted to pessimistic levels, weaker reads in the past only observed during major economic disruptions such as the COVID pandemic, the GFC, and the recession of the early-90s.”

“The pressure on profit margins persists as businesses are unable to pass through costs to higher prices. While some firms have raised prices to maintain their profitability, these increases lag well behind the rise in input costs.

“Encouragingly, investment intentions have defied deteriorating conditions. However, with the government’s temporary full expensing measure set to end and the possibility of further interest rate rises on the horizon, firms’ investment plans may be disrupted,” Mr Alexander noted.

Read the full report here

The ACCI-Westpac Survey of Industrial Trends, Australia’s longest running business survey, dating from 1966, provides a timely update on manufacturing and insights into economy-wide trends.