Recent quarter results from the Australian Chamber-Westpac Survey of Industrial Trends shows that the Australian manufacturing sector is gathering momentum again, following sharp declines last year.
Businesses’ plans to invest in plant and equipment are at the highest levels in five years, taking advantage of record low interest rates and government support measures such as the temporary full expensing, Australian Chamber of Commerce and Industry chief economist Dr Ross Lambie said.
“Strengthening business investment is the key to improving productivity and increasing competitiveness,” Lambie said.
According to the Australian Chamber-Westpac Survey of Industrial Trends, the broader economy’s rebound provided a boost to the manufacturing sector, according to Westpac senior economist Andrew Hanlan.
“Activity conditions strengthened to 63.1 in the June quarter, up from 59.4 in March, the survey found,” Hanlan said.
“This well above 50 reading indicates that the manufacturing sector is expanding at a healthy clip. Respondents reported a sharp lift in new orders, at a net +35 per cent, an improvement on +25 per cent in March and the strongest result since the end of 2018.
“Respondents remain in a positive mood, with a net 43 per cent expecting the general business situation to improve over the next six months. They are also optimistic about prospects for their own business, expecting a further increase in new orders and output, albeit the rate of increase is expected to ease somewhat from the current frenetic pace,” he said.
“The Expected Composite is elevated at 60.6, pulling back from 66.7. A wave of policy support has also gained traction, driving a flurry of home building activity, as well as a jump in business equipment spending.
Respondents are intent to grow their businesses in response to this lift in orders and output.
“Hiring intentions advanced to record levels, with a net 21 per cent of firms intending to expand their workforce over the upcoming quarter. A net 23 per cent intend to increase equipment investment spending in the next year,” Hanlan said.
But to allow the sector to thrive further, certain constraints must be dealt with.
“The Labour Market Composite Index strengthened further, with manufacturers continuing to expand their workforce, and expectations for future employment remain positive,” Lambie said.
“However, employers are having increasing difficulties finding experienced workers as a result of domestic and international border closures – these labour constraints are at levels not seen since September 2007.”
Another factor to consider is supply chain disruptions.
“Manufacturers continue to operate below full capacity, despite growth in new orders and output, as material and labour constraints limit production,” Lambie said.
“They’re finding it increasingly difficult to source some key components of production from international suppliers.”
“Lingering disruptions and restrictions around COVID are hampering businesses’ ability to lift production,” Hanlan said.
“Profit expectations were marked lower, to a net +12 per cent from a net +21 per cent, despite prospects for strong turnover, as cost pressures escalate. Difficulties in finding labour and snap lockdowns are also significant headwinds.”
The survey trends highlight the vital need for government reform, Lambie said.
“While respondent’s expectations are currently upbeat, crucial reforms are required to ensure that Australian manufacturing can be sustainable into the future,” Lambie said.
“Businesses need to see a plan for the reopening of international borders in a safe and staged manner to accelerate the resolution of skills and material shortages.
“If we don’t act with urgency now, there is a significant risk Australian manufacturing will struggle to remain competitive against our international counterparts, disrupting our long-term economic recovery.”
Click here to view the full Australian Chamber-Westpac Survey of Industrial Trends report.