Construction, infrastructure spending drive manufacturing results

14 Sep 2017 |

Australia’s manufacturers are benefitting from a strong upswing in public infrastructure spending, with stronger world growth and a relatively low dollar supporting growing exports, the latest Australian Chamber-Westpac Survey of Industrial trends has found.

Andrew Hanlan, Senior Economist at Westpac, said:

“The Westpac–AusChamber Actual Composite index strengthened in the September quarter, up 1.1 points to 66.1. This extends the rebound from 55.1 in June 2016, a dip coinciding with the July Federal election.

“The above par reading for the Composite index, which has trended higher since 2014, reflects strength in new orders, output, overtime, backlog and employment. September maintained strength in output, new orders and employment, while backlog and overtime lifted.

“Manufacturing is benefitting from a strong upswing in public infrastructure spending; a lift in private non-residential construction; an elevated level of home building activity; stronger world growth; and a still relatively low Australian dollar. However, there are some negatives: consumer spending is lacklustre, constrained by slow wage growth; while offshore competition in the manufacturing sector continues to be intense.

“The modest uptrend in exports has resumed after stumbling in 2016, with a net 8 per cent of firms indicating a rise in export deliveries. Export expectations are moderately positive, coinciding with rising world trade volumes after a period of contraction as well as continued support from a relatively low AUD.

“Expectations are positive, centred on new orders and output as well as backlog and overtime. The Expected Composite is at 65.2 in September, down slightly from 65.7 in June. A net 35 per cent expect the general business environment to strengthen over the next six months, continuing the upbeat mood.

“Equipment investment intentions of respondents have been positive over recent years in response to rising demand and consistent with some reduction in the sector’s spare capacity, as well as improving profitability. A net 17 per cent expect to increase equipment investment in the next year. Building intentions have dipped to a net –3 per cent, down from 9 per cent in June.

“The survey’s Labour Market Composite, which broadly tracks economy-wide jobs growth, is at 60.1 in September, pointing to continued solid jobs growth in 2017. The index correctly foreshadowed the acceleration in Australian employment evident in the first half of this year.

James Pearson, CEO of the Australian Chamber of Commerce and Industry, said:

“The story for Australian manufacturers is positive, but it’s not plain sailing yet. On the one hand, Australian manufacturers are experiencing fierce offshore competition and rising cost pressures, on the other, exports,  profit expectations and employment are up, so too are expectations around wage growth.

“The survey shows conditions in the industrial sector and the broader economy are –  and are expected to remain – buoyant.  Output, new orders and employment have all increased strongly according to the survey. We know conditions are patchy though.

“Strong public infrastructure investment, a pick-up in global conditions and non-residential construction is supporting the economy and offsetting challenging conditions in other sectors such as retail. We have seen 93 per cent of respondents suggest the business situation in Australia will either improve or remain the same over the next six months.  That’s a good result.

“A key positive from the survey is that employment growth is expected to remain robust. Survey respondents reported that, on balance, they increased their work force in the September quarter.  The use of overtime has also risen sharply and spare capacity has eased, with manufacturing employers expecting to increase wages over the coming year.  We expect to see manufacturing employment growth continue to accelerate.

“In the March and June quarters, commodity and energy prices created a price shock for manufacturers. The pace of that growth has eased a little into this quarter, but these costs are still rising. Our economy cannot afford for high energy prices to become the new normal for manufacturers.

“While manufacturers are investing in plant and equipment, it is worrying to see big investment decisions such as building intentions drop off.  As with all investment decisions, confidence and certainty matters, and while manufacturers’ expectations remain positive, longer term certainty over energy prices and supply and company tax rates would certainly help.

“To cement these gains we need to see improvements in energy prices, certainty on tax rates, better business regulation, better employment regulation and a cohesive plan for better conditions for Australian business.

Andrew Hanlan

Westpac Senior Economist

P  |  02 8254 9337

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