Manufacturing sentiment dives as cost crisis hits

Growth in local manufacturing has been slashed as surging energy costs, rising interest rates, record labour shortages, and lingering supply chain challenges weigh heavily on the output and forward sentiment, the latest ACCI-Westpac Industrial Trends Survey has revealed.

Westpac senior economist Andrew Hanlan said that conditions faced by the manufacturing sector have shifted dramatically, from the upbeat tone of three months ago to a sobering end to the 2022 year, with a challenging outlook. Earlier tailwinds to activity have faded, the RBA has rapidly increased interest rates and energy costs have soared, impacting the competitiveness of the sector.

“The Westpac-ACCI Actual Composite index – a gauge of business conditions – moderated sharply in the December quarter, stepping down from an elevated 64.6 in the September quarter to 49.0. With a reading around the break-even mark of 50, this indicates that conditions are approaching a stalling speed,” Mr Hanlan said.

“The weakening of the Composite index reflected broadly flat new orders, a decline in employment and overtime in the sector, and a sharp deceleration in output.

“New orders all but stalled in the December quarter, with only a net 2 per cent of respondents reporting a rise. The burst of demand enjoyed by the manufacturing sector on the reopening of the economy from delta lockdowns and the omicron disruptions has come to an end.

“The Expected Composite, which proved to be overly optimistic in the previous update, eased from 60.8 to 54.9 in the December quarter, reflective of the softer demand outlook.

“The mood of manufactures has turned deeply pessimistic. A net 19 per cent of respondents expect general business conditions to worsen over the next six months. This is a sharp deterioration from three months ago, when business sentiment was positive and around average levels, at plus 18 per cent.

“The souring of the business mood reflects the slowing of demand and spiralling costs. The survey reports that in addition to ongoing material and labour shortages, surging energy costs have instigated a cost crisis, significantly reducing the competitiveness of the sector and threatening the viability of some businesses.

“In the December quarter, a net 76 per cent of firms reported a rise in average unit costs, well above the net 59 per cent in Q3 and the highest reading since the high inflation days of 1982.

“Against this challenging backdrop, manufacturers profit expectations have swung from subdued in the September quarter, at a net plus 8 per cent, to deeply negative, with 13 per cent anticipating a deterioration over the upcoming twelve months.”

ACCI chief executive Andrew McKellar warned that soaring input costs were beginning to weigh heavily on factory output, weakening forward sentiment as local manufacturers expected little reprieve in the year ahead.

“The remarkable rebound in activity enjoyed by the manufacturing sector following the pandemic appears to be well and truly over,” Mr McKellar said.

“Like consumers, manufacturers are facing significant cost pressures. This threatens to squeeze already tight margins, as manufacturers are often unable to pass on increased costs to consumers in full.

“Relief announced last week to address soaring power bills will provide some respite, however energy-intensive firms will still face higher costs, and many are already locked into long term contracts at elevated prices. A long-term roadmap for clean, affordable, and reliable energy is sorely needed.

“As economic conditions worsen, manufacturers across the country are reining in spending. The upcoming federal budget should kick-start a longer-term strategy to reverse a decade of declining growth in capital spending otherwise we risk lagging behind other advanced economies.

“There is little reprieve for manufacturers on the horizon, especially for those firms that are exposed to higher gas and power prices. Coupled with far reaching changes to workplace laws, this could see a difficult situation become even more challenging.

“As we anticipate a more challenging year for local manufacturers in 2023, it’s imperative that government works to keep energy, labour, and material costs down.”

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.

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