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Manufacturers plan for more investment and new jobs

23 June, 2016

Australia's manufacturers remain upbeat thanks to an uptick in home building activity and the lower Australian dollar, although the surge in confidence of late last year is abating, according to the June quarter Australian Chamber-Westpac Survey of Industrial Trends.

Andrew Hanlan, Senior Economist at Westpac, said:

"The Westpac-Australian Chamber Actual Composite index moderated in the June quarter to 55.1 points, down 6.3. That is still a positive reading, coming on the back of a particularly strong 61.4 points in March, to be more in line with the average for 2015 of 56.4 points.

"The above-par reading for the Composite index, which trended higher in 2014 and 2015, reflects strength across new orders, output and overtime, and an emerging resilience in employment.

"Manufacturing is benefitting from a strong upswing in new home building activity, although rates of growth have moderated, as well as the lift in renovation activity and the significant improvement in competitiveness flowing from the sharply lower currency, down 20 per cent against the US dollar since mid-2014.

"Even so, the cycle remains constrained. Mining investment is turning down sharply and global fragilities persist. Consumer spending has gained momentum recently, but remains far from strong.

"The modest uptrend in exports was broken in June, with a net 3 per cent of firms reporting a decline. Expectations are for the uptrend to resume, supported by the lower Australian dollar but constrained by still sluggish world growth.

"Expectations are positive, centred on new orders and output. Firms intend to respond to this strength by increasing overtime and broadly maintaining their existing workforce.

"The Expected Composite index is at 60.8 points, up 2.0 on March. A net 18 per cent expect the general business environment to strengthen over the next six months, an upbeat mood, up from a net 15 per cent in March but down from a net 38 per cent in December.

"Businesses are looking for 2016 to be a positive year for profits, driven by rising turnover and a lower Australian dollar boosting export returns. A net 19 per cent expect profits to rise in the 12 months ahead.

"Investment intentions have strengthened, consistent with an extended trend reduction in the sector's spare capacity and improving profitability. A net 21 per cent of firms expect to increase equipment spending in the next year. Indeed, official data reveals that the sector increased equipment investment in 2015, up 9 per cent. Investment plans for building investment are more muted, at a net 3 per cent.

"The survey's Labour Market Composite moderated to a still positive 54.6 points in June, down from a high of 56.9 in March. The Index, which correctly foreshadowed the strengthening in economy-wide jobs growth evident over the past year, points to solid job gains during 2016."

James Pearson, CEO at the Australian Chamber of Commerce and Industry, said:

"The latest Australian Chamber-Westpac Survey of Industrial Trends confirms positive sentiment in Australia's manufacturing sector. While some indicators have softened the overall outlook is encouraging. Manufacturers have posted strong results for new orders, output and overtime.

"The positive investment intentions, particularly for equipment spending, indicate an underlying confidence that should foreshadow growth in the year ahead. It is gratifying to see an emerging resilience in employment, demonstrating progress in the diversification of the economy.

"The results signal that all parties in the election campaign need to strengthen confidence in the manufacturing sector so that the positive sentiment of recent surveys is continued. Despite a recent increase, the low Australian dollar has benefitted exporters and helped to create the right environment for a suite of policies that will improve Australia's international competitiveness.

"This election campaign the Australian Chamber is calling on all parties to commit to our Top 10 in 10, which are 10 steps towards a more competitive Australia. Through action on areas including apprenticeships, corporate tax, government spending, workplace relations and visas we can return Australian to the top 10 of the Global Competitiveness Index within a decade."

There were 287 respondents to the Australian Chamber-Westpac Survey of Industrial Trends from across the manufacturing sector. The survey was closed on June 6, 2016. Scores above 50 indicate that positive responses outnumber negative ones. The survey, the longest running business survey in Australia, dating from 1966, provides a timely update on the manufacturing sector and insights into economy-wide trends.

The survey results are available on the Australian Chamber website.

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