Manufacturing sector expands prior to support winding back

The manufacturing sector is leading Australia’s economic recovery, with the nation’s peak industry survey showing the sector expanding at a strong pace in early 2021.

The Australian Chamber – Westpac Survey of Industrial trends has shown the actual composite index – a guide to business conditions – has jumped to 60.4, improving from 48.8 in December and up sharply from the June low of 24.

“The manufacturing sector is now well into expansionary territory, with output, new orders, number of employees and overtime worked rebounding strongly from the extreme lows of the June quarter and now firmly positive,” ACCI’s acting CEO Jenny Lambert said.

“Expectations for orders and employees are well above the current level, indicating Australian manufacturers anticipate conditions will continue to improve this year.

“However, this positive business investment sentiment is likely to be tested as government support programs are wound back and the vaccination rollout encounters delays.”

Westpac Chief Economic Andrew Hanlan said the manufacturing sector had “turned a corner”.

“The well above 50 reading indicates that the sector expanded in the opening months of 2021. Respondents reported a sharp lift in new orders, at a net +27%, the first increase since the end of 2019.

“Respondents are in a very positive mood, with a net 46% expecting the general business situation to improve over the next six months.

“They are also optimistic about prospects for their own business, expecting this strong momentum, centred on rising new orders, to continue in the June quarter. The Expected Composite is at historically high levels, at 67.

“The brisk rebound in the broader economy is clearly providing a boost to the manufacturing sector. Consumer spending has bounced back strongly. A wave of policy support is driving a strong uplift in home building activity, as well as an increase in business equipment spending.

“Respondents are intent on expansion 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 June quarter. A net 27% intend to increase equipment investment spending in the next year.

“Within this broader recovery, the survey also points to some areas of concerns. These relate to exports, which are yet to advance, rising input costs and difficulties in finding labour.”

Ms Lambert continued: “Until the vaccine roll-out is complete, the risk of further COVID outbreaks with consequent circuit-breaker lockdowns remains. This will continue to weigh on business confidence and will hold back the manufacturing sector from returning to its full potential.”

The full report can be found on the Australian Chamber website.

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