Australian small and medium-sized manufacturing businesses recorded sharp falls in revenue, profitability and inventory levels in the first quarter of 2026 as disruption linked to the Middle East conflict weighed on markets, according to a new report from Unleashed.
The latest Manufacturing Health Index from Unleashed, based on data from more than 600 Australian manufacturers, found average revenue fell 42 per cent quarter-on-quarter to $356,000 in Q1 2026, down from $619,183 in Q4 2025 and 44 per cent lower than the same period last year.
The report said manufacturers across sectors including food and beverage, clothing and fashion, construction, and electronics were facing increasing uncertainty as higher energy costs and weaker spending conditions affected demand and margins.
Average gross margins fell to 32.8 per cent in Q1, down from 38.47 per cent in the previous quarter, marking the lowest profitability level recorded by the company since it began tracking the data in 2018.
Jarrod Adam said manufacturers had entered 2026 after a period of cautious optimism and lean inventory management.
“The manufacturing base was heading toward a leaner model in 2025,” Adam said.
“With recent events, manufacturers will now be taking a particularly cautious approach to replenishment and overall spending. If the disruptions continue into the weeks ahead further belt tightening could be expected.”
Stock on hand fell to an average of about $200,500 in Q1 2026, down 56 per cent compared with the same quarter last year, while manufacturers also reduced raw material purchases to an average of $240,182, less than half the level recorded a year earlier.
The report found beverage manufacturers experienced one of the steepest declines, with average revenue dropping 45 per cent quarter-on-quarter to $341,851. Clothing, footwear and accessories manufacturers also reported weaker results, while construction manufacturing posted its lowest revenue figures since 2020.
Food manufacturing was identified as a relative bright spot, with margins improving despite lower revenue.
“It’s good to see manufacturers focus on what they can control and food manufacturers are ensuring they aren’t sitting on mountains of cash tied up in inventory which is helping their margin resilience,” Adam said.
Peter Turner, managing director of Australian manufacturer ThinTanks, said the company had experienced rising sales alongside growing cost pressures.
“In the past few months, sales have been increasing, but so have costs. As an oil-based product that we freight across Australia, our margins are under real pressure,” Turner said.
“That has meant pushing through price increases, but despite that, demand has held up well.”
Turner said uncertainty around global conditions made forecasting difficult.
“It is difficult to know where things go from here. Our business runs on six to eight week lead times, so there is a lag before the numbers fully reflect what is happening,” he said.
“Any shift in the global outlook could have a significant impact, but we have also seen how quickly things can swing the other way.”
The report said supply chain disruptions had not yet materially appeared in the data, with lead times falling to an average of 14 days during the quarter. However, it warned shipping volatility and higher energy prices could affect supply chains in the months ahead.
Adam said industries with high input costs were likely to feel the impact of rising energy prices first.
“Industries with high input costs are where we would expect to see the sting of rising energy costs early and that seems to be borne out by the survey,” he said.
The report also pointed to ongoing interest rate pressures, noting recent Reserve Bank of Australia cash rate increases and expectations inflation would remain elevated for longer.
“The challenge for 2026 is uncertainty,” Adam said.
“Manufacturers must leverage technology to manage rising costs and mitigate the challenges which are out of their control.”
