Manufacturing primed to surge

14 Dec 2021 |

Australian manufacturing is primed to surge with business sentiment jumping to levels not seen in decades, as expectations for future orders reach new heights. Despite this, the sector’s recovery continues to be constrained by supply chain disruptions and labour shortages.

The December quarter results from the ACCI-Westpac Survey of Industrial Trends released today reveals that Australian manufacturers hold a very positive outlook for the sector’s future, with business sentiment reaching its highest level since 1994 – a net 57% of respondents expect the general business situation to improve over the next six months. Yet, skill and material shortages have continued to constrain the sector’s growth.

“The latest quarterly Survey of Industrial Trends has confirmed that lockdowns and border closures continue to cruel our manufacturing sector. As these restrictions have been gradually removed, manufacturers are anticipating a strong and accelerated recovery in 2022,” ACCI chief executive Andrew McKellar said.

“However, structural issues with international freight supply chains mean manufacturers are finding it increasingly difficult to source key components of production – these material constraints are at levels not seen since the oil shock of the 1970s. With input costs increasing at a much faster rate than prices, manufacturers are facing significant cost pressures.

“Skills shortages are also identified as a major impediment to the growth in Australia’s manufacturing output. With labour constraints recorded at their highest in 33 years, employers are having increasing difficulty finding experienced workers as a result of domestic and international border closures.

“Despite 71% of manufacturers expecting an increase in new orders, the sector will not be able to realise its potential with material and labour constraints limiting production. Resolving these shortages will be critical for the industry’s sustained recovery.

“With our vaccination rates reaching almost 90 per cent across the country, the survey indicates that manufacturers are encouraged they won’t see a return to extended and widespread lockdowns. It’s critical that now we have reopened, we stay open; the manufacturing sector cannot afford to return to lockdowns and restrictions.

“While investment intentions remain positive, this measure has softened in the most recent result and points to the justification for continued supportive policy in this area. In particular, we are calling on the Government to consider a further extension of the instant asset write-off. This measure will see a return to strong business investment which will flow through to economic and employment growth.

Westpac Senior Economist Andrew Hanlan said that the stalling of conditions in the manufacturing sector, which emerged in the September quarter, extended into the December quarter.

“Conditions in the December quarter proved to be more challenging than respondents anticipated. The staggered reopening from the delta lockdowns in NSW and Victoria crimped demand, while significant supply headwinds continued, around the availability of labour and materials.

“The Westpac-ACCI actual composite index held around the breakeven mark of 50, at 50.8, following a 51.2 in the September quarter and well down from a buoyant 63.1 in June, ahead of the delta outbreak. Output was flat in the quarter, the survey reports, so too employment levels in the sector. New orders expanded modestly, up a net +10 per cent, just sufficient to sustain output at current levels.

“Expectations are upbeat as NSW and Victoria emerge from lockdown, facilitated by high vaccination rates. The Westpac-ACCI expected composite jumped to 73.6, an historic high. Respondents anticipate a burst of new orders in the opening quarter of 2022, including an element of catch-up, with a net 71 per cent expecting an increase – a record high, coming off a low base.

“The economy, which had considerable momentum ahead of the delta outbreak, is set for a strong recovery in 2022, supported by substantial policy stimulus. Pent-up household demand, an uptrend in home building activity, a lift in business equipment spending and a wave of public works projects will boost orders for manufacturers.

“However, at the same time, the survey highlights that the manufacturing sector faces considerable supply headwinds. This is leading to higher prices for consumers and is a potential handbrake on the pace of recovery.

“Manufacturers’ ability to produce is being constrained by difficulties in finding labour, which are the most acute since 1988, and difficulties in sourcing inputs, which are the most pronounced since the oil shock of the mid-1970s. This reflects global supply bottlenecks and border closures.

“Manufacturers are facing intense and sustained cost pressures – at the highest level since 2008. A net 38 per cent reported a lift in costs in the December quarter. Profit expectations, while bouncing back on the prospective reopening and increased turnover, are stuck at levels a little below the long-run average in the face of rising costs.

Read the full report.

Jack Quail

Media Adviser

P  |  0498 181 207

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