Australian manufacturers to face enduring cost crisis in 2023

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The Australian manufacturing sector is set to see a downward trend in the upcoming months as high inflation, spiralling energy costs, and ongoing labour shortage drag the industry’s economic outlook, according to the latest ACCI-Westpac Survey of Industrial Trends

The Westpac-ACCI Actual Composite showed an improved rating in March with 55.0 points, up from December’s 49.0, but the figure is still down from the mid-2022 highs of around 65. 

Westpac senior economist Andrew Hanlan said the result reflects a partial rebound to a modest expansion in the March quarter but in the context of a trend downturn. 

The month also showed similar expansions in output and new orders and a moderated increase in employment—broadly in line with December quarter expectations. 

“New orders, having stalled in Q4, bounced to a mildly positive level, with a net 18 per cent of respondents reporting a rise. This represents a material cooling from the burst evident in Q2 and Q3 last year, associated with the reopening,” Hanlan said. “Expectations for new orders are subdued, only a net 4 per cent of respondents anticipate a rise next quarter.

The survey’s Expected Composite declined from 54.9 to 52.1, representing the softest reading since 2014, outside of the mid-2020 pandemic low. 

The survey also found that the general business mood is deeply pessimistic, with a total of 15 per cent of respondents saying that they expect the general business situation to worsen over the next six months. 

“Across the Australian economy, the fading of earlier tailwinds and intensifying headwinds from high inflation and sharply rising interest rates are contributing to a downbeat outlook for demand. At the same time, labour shortages and cost pressures continue,” Hanlan noted. 

Furthermore, the survey also provided further confirmation that manufacturers are facing a cost crisis and a significant loss of competitiveness. 

Australian Chamber of Commerce and Industry CEO Andrew McKellar affirmed the impending uphill battle faced by manufacturers in the upcoming months, noting that “there is simply no sugar-coating the outlook for Australia’s manufacturing sector in the year ahead.”

“Higher interest rates have taken their toll on manufacturers’ investment intentions so further support in the May budget will be critical. Without a continuation of the Temporary Full Expensing Measure, we can expect to see a substantial fall in business investment in the second half of 2023,” McKellar said.