Extra support needed for Australian exporters

There have been calls for the Rudd Government to start its review of trade policy and look to enhance support for exporters.

Calls for the Rudd Government to start its review of trade policy and look to enhance support for exporters.

IN the face of what seems to be constant pressure from international competition, particularly from China — and an exchange rate that is higher than it has been for around 23 years — manufacturers are constantly re-engineering their operations and belt-tightening to remain competitive.

Industry, for example, is developing global supply chains which offer potential savings in logistic costs and improved supply delivery. Even so it still employs 1.1 million people — and that is expected to grow by 2.2% this year.

At this stage industry is cautiously looking forward to moderate growth in the year ahead.

When Ai Group surveyed over 500 manufacturers across all states in late December, the consensus view was that manufacturers expect nominal sales to repeat the robust performance of 2006-07 but that growth in volume terms is likely to remain moderate.

Companies in the survey told us that nominal sales are expected to rise by 7.2% in 2008 — marginally higher than the 6.9% increase in 2006-07.

However, after adjusting for goods price movements, sales volumes are likely to increase by a modest 2.7%.

This suggests that our manufacturers are optimistic — but very cautious just the same. They see real opportunities from the expectation of a strong domestic economy in 2008 but they are less encouraged by the outlook for exports.

Our study shows that in nominal terms, manufacturing exports rose relatively strongly in 2006-07, an increase of 13.7% although in volume terms the increase was significantly smaller.

However, manufacturers are forecasting exports in nominal terms will rise by 7.5% in 2008. The Australian dollar is expected to remain relatively strong for much of 2008.

Adjusting for price movements, the impact of the Australian dollar will see exports in volume terms grow by just 0.5%, the weakest outcome in nine years.

To mitigate any possible weakening in domestic demand, manufacturers are building up a safety margin.

The belt-tightening can be seen in the survey data which forecasts a slowing in the growth of capital expenditure and R&D.

Expenditure on new capital equipment is expected to fall for a second consecutive year, dropping by 1.2%, while expenditure on R&D is forecast to rise by less than 1%. Use of offshore materials (as a percentage of sales) is estimated to rise to 32% from 31.7%.

Despite these cut-backs, companies do understand that they must invest in new products and services. We estimate that new product intensity (the percentage of sales derived from new products introduced in the last three years) will rise from 21.2% in 2007 to 23.1% in 2008.

Companies are also “offshoring” by moving part or whole of their operations overseas or straddling two areas and using a greater share of imported materials in their domestic production.

Australia’s manufacturing industry has shown an extraordinary resilience against the odds and it is still arguably one of the biggest sectors of the Australian economy, accounting for 20% of our exports.

The indication that growth in export volumes will be lower in 2008 is really no surprise as virtually no manufacturer is immune from deteriorating export competitiveness with a dollar between 85 and 90 cents against the US dollar.

With this in mind, we believe there is an urgent need for the new Rudd Government to start its review of trade policy and look to enhance support for exporters.

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