It is well known that manufacturing is a critical contributor to Australia’s industrial ecosystem. There are 90,000 manufacturing businesses in Australia, which employ around 900,000 workers. It is the sixth largest industry in Australia and produced $124 billion worth of value-add last financial year.
Association Comment Innes Willox, Chief Executive, The Australian Industry Group
However, less understood is the role manufacturing plays in positively contributing to cost-of-living issues during the recent period of high inflation in Australia. Our manufacturers directly make the goods used by Australian households – food, beverages and consumer durables – and indirectly contribute by producing the industrial inputs used across the economy.
The inflationary pressures facing households can often be traced back to cost pressures on industry. An informed discussion of the cost-of-living crisis must start from the recognition that inflation strains both business and households alike.
The dramatic increase in consumer prices over recent years has increased financial stress on many households. Pressure has been especially high on mortgagee and renting households, which have had to manage surging home loan repayments or rents.
However, industry has equally suffered from the pain of high inflation. Producer prices – the price of goods and services used and made by industry – have risen by a similar magnitude to consumer prices. Indeed, producer prices are currently rising at the rate of 4.8 per cent per annum, faster than the current 3.8 per cent rate for CPI.
If we look at the recent experience of manufacturing, it is clear that surging costs have imposed a heavy burden. According to official price surveys, the inputs used by manufacturing have increased by 20 per cent in price over the last three years. Some of the inputs which have seen the most dramatic increases include:
- Ferrous metals products (i.e. steel), up by 35 per cent;
- Electrical equipment, up by 40 per cent;
- Non-ferrous metals (including aluminium), up by 49 per cent;
- Basic chemicals, up by 51 per cent; and
- Natural gas – the energy source which underpins much of Australian manufacturing – up by a massive 58 per cent.
Never before have our manufacturers had to contend with such a dramatic and sustained rise in prices for material inputs.
So too have employment pressures weighed on the industry. Australia’s labour market – which has not been as tight since the mid-1970s – poses further challenges.
Over the three-year inflationary period, average wage rates in manufacturing have risen by 11.5 per cent. This is the highest increase of any industry in Australia.
There are presently 17,000 unfilled jobs in manufacturing, up from 11,000 just before the pandemic. An excess of empty jobs means chronic continuity problems on the shop floor, compounding cost pressures.
Recruitment difficulties also bedevil the industry. In the June quarter of this year, 63 per cent of recruiting manufacturers reported difficulties in filling advertised roles. This is the highest recruitment difficulty rate of any industry and exceeds that reported by constructors – an industry with widely known hiring challenges.
These supply chain and employment pressures have led to a squeeze on manufacturer margins. Manufacturing is highly exposed to competition from imports, and often cannot fully pass on rising costs. This leaves many manufacturers more exposed to cost pressures than most other branches of industry.
In the 2022-23 financial year – the most recent for which sub-industry figures are available – operating margins in Australian manufacturing fell from 8.8 per cent to 7.9 per cent, with nine of thirteen subindustries reporting declines. The three manufacturing subindustries that are directly oriented to consumer markets – food, beverages and TCFs – all saw significant margin declines.
Our manufacturers are feeling the pinch of inflation in the same way as consumers. Indeed, had consumer-oriented manufacturers increased their prices faster to protect their margins, Australia’s cost of living issues would have been even worse.
This points to the need for a new discussion in Australia on how to best manage these pressures. Attempts to play the blame game, and scapegoat certain businesses or industries, fail to recognise that high inflation hurts households and businesses alike.
A more productive approach is to address the root causes for price rises across our economy as a whole.
Addressing workforce issues is an important place to start. Skills shortages, unfilled jobs and high wages growth all drive extra cost into the industries that supply goods and services to Australian households. A more efficient, flexible and balanced labour market would go a long way to easing these pressures.
Yet the Government’s recent legislative changes to the industrial relations system are moving in the wrong direction. Whether for casual employment, labour hire, digital jobs and more besides, these reforms have introduced rigidities which raise cost and make life harder for employers – to say nothing of their impact on productivity, or our competitiveness in a more challenging global economy.
Cost of doing business pressures are making our cost of living crisis worse. It’s time that we take a mature and holistic approach to fighting inflation that helps both industry and households alike.
