Vaccinations key to unlock Australian manufacturing

Australian manufacturing is fraught with supply chain disruptions and labour shortages on a scale not seen in decades. Despite this, the sector remains resilient but is relying on achieving high vaccination targets to end lockdowns and allow the economy to reopen, the latest industry survey has found.

Released today, the September quarter results from the Australian Chamber-Westpac Survey of Industrial Trends shows that Australian manufacturers are expecting conditions to bounce back when the economy reopens. However, skill and material shortages are likely to constrain the sector’s potential growth.

“The latest quarterly Industrial Trends Survey found that despite lockdowns in NSW, Victoria, and the ACT causing Australia’s manufacturing output to stall, expectations for future growth remain positive,” ACCI chief executive Andrew McKellar said.

“However, global supply chain disruptions mean employers are finding it increasingly difficult to source key components of production – these material constraints are at levels not seen since the oil shock of the 1970s. This is leading to cost pressures, with input costs increasing at a much faster rate than prices, putting pressure on manufacturers profits.

“Skills shortages are also identified as a major impediment to the growth in Australia’s manufacturing output. With labour constraints recorded at their highest in 21 years, employers are having increasing difficulty finding experienced workers as a result of domestic and international border closures.

“Manufacturers will continue to operate below full capacity, despite a growth in new orders, with material and labour constraints limiting their production. Business desperately needs a solution to these shortages.

“The survey indicates manufacturers are confident that high vaccination rates are the ticket out of the current lockdowns, a positive sign for growth in manufacturing and the economic recovery. As such, it is essential that momentum is maintained to reach the 80 per cent vaccination target as soon as possible.

“The longer it takes to achieve the 80 per cent vaccination target across the country, the longer it will be before manufacturing can return to operating a full capacity. Slow vaccination rates put the manufacturing sector and our economic recovery at risk.

“More encouragingly, investment intentions remain solidly positive, suggesting manufacturers remain confident in the future growth of their business. Growing business investment is fundamental to boosting productivity and sustaining strong economic growth as we emerge from the COVID crisis.

Westpac Senior Economist Andrew Hanlan said the manufacturing sector was substantially impacted as the Delta outbreak sent NSW and Victoria back into lockdown.

“Activity conditions virtually stalled in the September quarter, with the Westpac-AusChamber Actual Composite moderating from 63.1 in June to 51.2 in the September quarter, only a touch above the 50 break-even mark. Respondents reported output was flat, so too employment with the impact of the NSW and Victorian disruptions offset by gains elsewhere.

“The positive is that in comparison to the experience in mid-2020 the Survey reveals a degree of resilience in the face of the Delta outbreak. Output stalled, rather than contracting, and new orders expanded, rather than collapsing as occurred in 2020.

“Respondents reported a lift in new orders, at a net +12 per cent, although that still represented a moderation from a net +35 per cent in the June quarter. By comparison, during the initial nationwide lockdown of 2020, orders collapsed, declining by a net -53 per cent in the June quarter.

“This resilience reflects the considerable momentum in the economy ahead of the latest lockdowns, with an upswing in home building, strong consumer spending and the ongoing uptrend in government spending, all providing a boost to the manufacturing sector. By contrast, conditions were already sluggish ahead of the initial lockdown in 2020.

“Manufacturers are relatively positive about the outlook, the survey finds. There is a confidence that high vaccination rates will see NSW and Victoria reopen in the coming months, leading to a rebound in activity. The Expected Composite index is well above the 50 level, at 57.5, down only modestly from 60.6. A net 21 per cent of respondents anticipate a rise in new orders in the December quarter.

“Within this broader picture of resilience and confidence, the survey also points to some areas of concerns.

“Cost pressures have escalated during the pandemic to be at elevated levels, with a net 37 per cent reporting a lift in costs. This, and the hit from the lockdowns, is hurting profitability, with a net 1 per cent expecting profits to decline over the year ahead.

“Manufacturers’ ability to produce is being constrained by a number of aspects associated with the pandemic. Global supply bottlenecks have material constraints at the highest level since the oil shock of the mid-1970s, the survey finds. Border closures have contributed to labour constraints, which for the past three quarters were on average the highest since 2000, and before that, 1989.

Read the full report here

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