Australia’s manufacturing sector has bounced back from sharp declines last year, however its expansion is being hampered by labour shortages not seen in 14 years, the latest industry survey has found.
The latest quarter results from the Australian Chamber-Westpac Survey of Industrial Trends shows that while Australian manufacturing is gathering momentum, there are new constraints to the sector’s potential growth.
“The Labour Market Composite Index strengthened further, with manufacturers continuing to expand their workforce, and expectations for future employment remain positive,”ACCI’s Chief Economist Dr Ross 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.
“Supply chain disruptions were similarly identified as a major impediment to growth in Australia’s manufacturing output, with material constraints on a scale not seen since the 1970’s oil shock. Manufacturers continue to operate below full capacity, despite growth in new orders and output, as material and labour constraints limit production. They’re finding it increasingly difficult to source some key components of production from international suppliers.
“On the positive side, businesses’ plans to invest in plant and equipment are at the highest levels in five years. Businesses are using the opportunity of record low interest rates and the government support measures, such as the temporary full expensing, to invest in new plant and equipment. Strengthening business investment is the key to improving productivity and increasing competitiveness.
Westpac Senior Economist Andrew Hanlan said the broader economy’s rebound was “clearly providing a boost to the manufacturing sector”.
“Activity conditions strengthened to 63.1 in the June quarter, up from 59.4 in March, the survey found. 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%, an improvement on +25% in March and the strongest result since the end of 2018.
“Respondents remain in a positive mood, with a net 43% 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. 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 on growing their business in response to this lift in orders and output. Hiring intentions advanced to record levels, with a net 21% of firms intending to expand their workforce over the upcoming quarter. A net 23% intend to increase equipment investment spending in the next year.
“Within this broader recovery in orders and output, the survey also points to some areas of concerns. Lingering disruptions and restrictions around COVID are hampering businesses’ ability to lift production. Profit expectations were marked lower, to a net +12% from a net +21%, despite prospects for strong turnover, as cost pressures escalate. Difficulties in finding labour and snap lock-downs are also significant headwinds.”
Dr Ross Lambie said the survey trends highlighted the vital need for government reform.
“While respondent’s expectations are currently upbeat, crucial reforms are required to ensure that Australian manufacturing can be sustainable into the future. 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,” he said.
“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.”