Supply side headwinds limit pace of manufacturing recovery

15 Mar 2022 |

Australia manufacturers are facing labour and material shortages on a scale not seen since the 1970s oil shock with global supply chain disruptions only set to worsen in the coming months.

Released today, the March quarter results from the ACCI – Westpac Survey of Industrial Trends reveals mixed results for the manufacturing sector. While output improved early in 2022 as the economy reopened, the pace of recovery is being constrained by significant headwinds with manufacturers’ profitability deteriorating, squeezed by rapidly rising costs.

Westpac Senior Economist Andrew Hanlan said that business conditions in the manufacturing sector improved moderately at the start of 2022 as COVID-19 related restrictions were relaxed.

“The results of the ACCI-Westpac survey indicate that manufacturing output, having stalled over the second half of last year hit by the delta lockdowns, moved into a moderate expansion in the March quarter. Consumers have embraced fewer restrictions, spending more freely, providing a boost to manufacturers. Government spending is up strongly, another plus for the sector,” Mr Hanlan said.

“The Westpac-ACCI Actual Composite Index lifted into expansionary territory in the March quarter, printing at 56.7, up from the flat outcome in the December quarter, a reading of 50.8. Output expanded as new orders posted a moderate increase, with a net 14 per cent of respondents reporting that orders were up. This rise in activity was largely facilitated by working additional overtime, as well as a modest increase in employment numbers.

“The survey describes conditions expanding at a moderate pace currently against the backdrop of the recent weakening of home building activity, in part due to supply headwinds. The current growth pace is well below the brisk manufacturing expansion experienced during 2017 and 2018 when the home building sector was in a strong upswing. Disruptions around omicron at the start of the year were undoubtedly also a dampening factor.

“Expectations are positive as respondents anticipate that the expansion in new orders and output will extend into the June quarter. The Westpac-ACCI Expected Composite Index printed at a robust 61.7.

“Despite the more positive results around manufacturing activity, the survey again highlights that manufacturers face considerable pressures from rapidly rising costs and a shortage of labour and materials. These pressures intensified further in early 2022.

“The survey reports that 46 per cent of respondents experienced rising input costs, up from 38 per cent, reflecting the impact of ongoing supply chain disruptions globally and domestically. Cost pressures over the past year are the most pronounced since 2008, prior to the impact of the GFC.

“Manufacturers’ ability to increase production is being constrained by labour and material shortages, the survey reports, pressures that are the most acute since 1974. The unemployment rate has fallen to historically low levels, on rising demand and the closure, until recently, of the national border.

“The costs of these headwinds are apparent from the weakness of profit expectations. Despite increasing turnover, only a net five per cent of respondents expect profits to increase in the year ahead, a well below average reading and down from 18 per cent last quarter.

“While manufacturing remained resilient in spite of the Omicron surge, expectations have been dampened by the continued volatility in the global economy,” ACCI chief executive Andrew McKellar said.

“International supply chain bottlenecks are producing material constraints on a scale not seen in almost 50 years.  With the costs of inputs increasing at a much faster rate than prices, the Russian invasion of Ukraine and soaring commodity prices will undoubtedly lead to further pressure on manufacturers who are already being squeezed.

“With the Russian invasion of Ukraine and corresponding surge in commodity prices, further diversification of supply chains will be critical to ensuring businesses can source key components of production.

“Workforce shortages also continue to hamper the growth in Australian manufacturing output with labour constraints at their highest level since 1974.   Although businesses are taking on new hires, these have fallen considerably short of hiring intentions, representing the increasing acute skills crunch as border closures and pandemic disruptions continue to bite.

“Despite manufacturers experiencing an uptick in new orders, profitability is being squeezed, with approximately 50 per cent of manufacturers already reporting higher costs. Expectations of new orders also moderated, but remain solid, which will support output going forward.

“Encouragingly, manufacturers’ investment intentions experienced a slight uptick while business sentiment remains solidly positive.  It’s critical that the Federal Budget continues to support measures such as the instant asset write-off to create jobs and grow the economy.

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. 

For more information:

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