Australian manufacturers are facing an uphill battle in the coming months as a backdrop of high inflation, spiralling energy costs and the enduring labour shortage weigh heavily on the sector, the latest ACCI-Westpac Survey of Industrial Trends shows.

Westpac senior economist Andrew Hanlan said that a downward trend in the manufacturing sector is underway, with a challenging outlook for 2023 – notwithstanding a modest bounce in the opening quarter of the year.

“The Westpac-ACCI Actual Composite improved somewhat in the March survey, up to 55.0 from 49.0 in December, but still well down from the mid-2022 highs of around 65.

“The result represents a partial rebound to a modest expansion in the March quarter – but in the context of a trend downturn. The survey reported similar expansions in output and new orders in March and a modest increase in employment – broadly in line with December quarter expectations.

“Across the Australian economy, the fading of earlier tailwinds and intensifying headwinds from high inflation and sharply rising interest rates are contributing to a downbeat outlook for demand. At the same time, labour shortages and cost pressures continue.

“The Expected Composite eased from 54.9 to 52.1. That is the softest reading since 2014, outside of the mid-2020 pandemic low.

“The general business mood is deeply pessimistic, with a net 15 per cent of respondents anticipating that the general business situation will worsen over the next six months, little changed from 19 per cent last quarter and together around the lows of mid-2020, when the pandemic began.

“Businesses recognise that the cumulative impact from the RBA lifting interest rates from 0.1 per cent at the start of last May to be at 3.6 per cent currently, will be fully felt over the year ahead, likely leading to a sharp economic slowdown.

“New orders, having stalled in Q4, bounced to a mildly positive level, with a net 18 per cent of respondents reporting a rise. This represents a material cooling from the burst evident in Q2 and Q3 last year, associated with the reopening.

“Expectations for new orders are subdued, only a net 4 per cent of respondents anticipate a rise next quarter.

“The survey provides further confirmation that manufacturers are facing a cost crisis and a significant loss of competitiveness. Input cost pressures remain acute, with a net 70 per cent of manufacturers reporting higher input costs in March, little changed from December’s net 76 per cent and among the highest readings since 1982.

“Labour shortages remain intense, albeit not as extreme as six months ago. A net 42.3 per cent of respondents indicated that labour was “harder to find”, a still very elevated reading but down from the series high of 67.5 per cent last September.”

“There is simply no sugar-coating the outlook for Australia’s manufacturing sector in the year ahead,” ACCI chief executive Andrew McKellar said.

“While conditions improved modestly in the opening quarter, sentiment amongst manufacturers remains pessimistic as they face a cost crisis of persistently high power prices, elevated inflationary pressures and an ongoing skills shortage.

“Labour constraints remain acute with employers still struggling to fill job vacancies.  The upcoming overhaul of skilled migration rules must deliver greater flexibility for businesses that need access to in-demand workers.

“Higher interest rates have taken their toll on manufacturers’ investment intentions so further support in the May budget will be critical. Without a continuation of the Temporary Full Expensing Measure, we can expect to see a substantial fall in business investment in the second half of 2023.

“Beijing’s decision to abruptly unravel pandemic restrictions in December has spurred a rapid expansion of their manufacturing sector. By suddenly releasing this handbrake on growth, China has raised the stakes and reignited fierce competition with Australian industry.

“Selling prices continue to trail rising input costs, as manufacturers are only partially able to pass these through. With profits being squeezed, many local manufacturers have little option but to increase prices to ensure they remain viable.”

Read the full report.

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.