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Manufacturers' investment intentions rising in year ahead

15 December, 2016

Australia's manufacturers have finished the year strongly and are looking to increase investments in equipment and buildings in 2017, the December quarter Australia Chamber-Westpac Survey of Industrial Trends has found.

Andrew Hanlan, Senior Economist at Westpac, said:

"The Westpac-AusChamber Actual Composite index strengthened at the end of 2016, lifting to 60.3 points from 57.4 points in September and 55.0 points in June. 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 a lift in renovation activity. It is also enjoying a significant improvement in competitiveness flowing from the sharply lower currency, down 28 per cent against the US dollar from early 2013.

"Even so, the cycle remains constrained. Mining investment is turning down sharply and global fragilities persist. Consumer spending slowed to a modest pace in 2016.

"The modest uptrend in exports appears to have resumed after stumbling earlier in 2016, with a net 6 per cent of respondents reporting a rise in export deliveries. Expectations are mildly positive, supported by the relatively low Australian dollar, but constrained by sluggish world growth and weak world trade.

"Expectations are positive, centred on new orders and output. The Expected Composite index is at 62.1 points, up 1.1 points from September. A net 25 per cent expect the general business environment to strengthen over the next six months, an upbeat mood that is unchanged from September.

"Businesses are looking to 2017 to be a positive year for profits, driven by rising turnover and a lower Australian dollar boosting export returns. A net 22 per cent expect profits to rise in the 12 months ahead.

"Equipment investment intentions strengthened over the past two years, consistent with a 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. Investment plans for building investment are more muted at a net 6 per cent.

"The survey's Labour Market Composite, which broadly tracks economy-wide jobs growth, was 49.7 points in December, down from 50.3 points. A reading at this level points to robust jobs momentum heading into 2017."

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

"Business investment has been sluggish in recent times, so it is encouraging to see that the Australian Chamber-Westpac Survey of Industrial Trends shows that investment intentions are stronger heading into the new year.

"With a net 21 per cent of firms expecting to increase equipment spending in the next year and a net 6 per cent intending to invest in building, we can be cautiously optimistic that investment sentiment is becoming more positive. This is a testament to the resilience of Australian manufacturers, who are continuing to invest despite the headwinds revealed in the recent negative GDP figures.

"It is pleasing to see that manufacturers' output advanced for a 10th consecutive quarter, with a further 39 per cent expecting to lift output in the next three months. These levels are the highest in more than 10 years. Meanwhile capacity utilisation is lagging, with a net 5 per cent more respondents telling us they were operating below normal capacity than were operating above it.

"Manufacturers are benefiting from a lower currency, which has led to an improvement in export performance, but we cannot allow factors over which we have little control to determine our economic fortunes.

"Instead Australia must seize opportunities by undertaking the vital reform that we know will make our economy more competitive. That includes cutting the burden of company tax to stimulate investment, making it easier to hire people through sensible changes to workplace relations and helping our young people to get an apprenticeship.

"Without policies to encourage them, businesses will find it hard to create and sustain jobs."

There were 301 respondents to the Australian Chamber-Westpac Survey of Industrial Trends from across the manufacturing sector. The survey was closed on December 5, 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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