Labour and cost stress still biting manufacturing sector

Continuing labour shortages and cost pressures are contributing to a downbeat outlook for the manufacturing industry, according to a business survey. 

The Australian Chamber of Commerce (ACCI)-Westpac Industrial Trends Survey has found the sector is experiencing a “damaging slowdown”, with the actual composite index falling to 50.7 in the June quarter from 53.9 in the three months to March. 

“A reading around the break-even mark of 50 indicates that conditions within the manufacturing sector are stalling. The survey reported broadly flat new orders and employment, a decline in overtime and a slowing in output growth,” Westpac Chief Economist Bill Evans says. 

“The fading of earlier tailwinds and rising interest rates are contributing to a downbeat outlook for demand, while labour shortages and cost pressures persist.” 

Key survey results 

The expected composite index rose slightly to 52.6 in the June quarter, from March quarter’s 51.2, which was the softest reading since 2014, outside of the pandemic-era lows during 2020. 

New orders all but stalled in the June quarter, with a net 1% of respondents reporting a decline. Having fallen from 15% in the March quarter, growth in new orders is the softest non-pandemic-affected read since Q3 2013. 

In the June quarter, input cost pressures remained acute, with a net 67% of firms reporting a rise in average unit costs  little changed from March’s net 70% and among the highest readings since 1982. 

Labour shortages remain intense but have eased somewhat over recent quarters as the economy slowed and immigration numbers picked up following the international border reopening. Just over 50% of respondents indicated that labour was “harder to find”, off the high of 65.8% in Q3 2022. 

Bleak outlook 

Evans says 32% of respondents are expecting worsening business conditions over the next six months. However, nearly 30% of respondents plan to increase their equipment investment over the next 12 months, up from 10% in the March quarter. 

“Businesses report that the economic outlook remains bleak, as interest rates continue to rise; high inflation reduces real household incomes and margins are squeezed,” he says. 

“The survey reports there has been barely any let-up in the cost crisis facing manufacturers. This extended period of elevated costs, associated with labour and material shortages, and surging energy costs, must be threatening the viability of some businesses.” 

ACCI Chief of Policy and Advocacy David Alexander cautions that manufacturers’ viability will be tested in the coming months as significant headwinds constrain profitability. 

“The survey makes clear that there is little respite for local industry as profit margins continue to be squeezed tighter and tighter,” he says. 

“Manufacturers are by no means immune from the cost pressures that are also battering Australian households – two thirds of firms experienced increasing material costs in the last quarter. 

“At the same time almost 50% of firms expect their wages bill to rise by the end of 2023.” 

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