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Rebounding manufacturers look forward to more profitable 2017

22 September, 2016

Australia’s manufacturers have rebounded strongly in recent months and are confident of improving profits next year due to rising turnover and a lower Australian dollar, the September quarter Australia Chamber-Westpac Survey of Industrial Trends has found.

Andrew Hanlan, Senior Economist at Westpac, said:

"The Westpac-AusChamber Actual Composite index rebounded in the September quarter to 57.3 points, up 2.3 points. That returns the index to near its 2015 average.

"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, and a lift in renovation activity. It is also benefitting from a significant improvement in competitiveness flowing from the sharply lower currency, down 28 per cent against the US dollar since the 2013 peak.

"Even so, the cycle remains constrained. Mining investment is turning down sharply and global fragilities persist. Consumer spending was solid over the past year, but remains far from strong.

"The modest uptrend in exports appears to have stumbled in 2016, with respondents reporting export deliveries were unchanged in the September quarter. Expectations are for the uptrend in exports to resume, supported by the relatively low Australian dollar, but constrained by weak world trade.

"Expectations are positive, centred on new orders and output. Firms intend to respond to this strength by increasing overtime and, at the margin, adding to their existing workforce. The Expected Composite index is at 60.4 points, down only 0.6 points from June. A net 25 per cent expect the general business environment to strengthen over the next six months, an upbeat mood, up from a net 18 per cent in June.

"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 25 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, a net positive 8 per cent.

"The survey's Labour Market Composite rebounded in September to a positive 57.6 points. The Index, which correctly foreshadowed the strengthening in economy wide jobs growth evident during 2015, points to solid job gains over the remainder of 2016 and into 2017."

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

"The latest Australian Chamber-Westpac Survey of Industrial Trends shows that Australian manufacturing is turning circumstances to its advantage. Manufacturers are tapping into new home building and renovation activity in Australia and a more competitive currency internationally to make sales at home and abroad.

"The emerging resilience in employment is pleasing to see, as is the renewed strength across new orders, output and overtime.

"The positive outlook is encouraging, with a net 25 per cent of manufacturers expecting the general business environment to strengthen in the next six months. With new orders and output rising, many businesses plan to increase overtime and hire new staff.

"The lower Australian dollar is improving our international competitiveness, but there is much more that policy-makers can do to help. We need to make it easier for Australian businesses to get their products to the world and for them to access inputs from abroad. We cannot afford to shut ourselves off from the global economy.

"Policy-makers can improve the capacity of businesses to expand opportunities for workers as enterprises grow through workplace relations reform that makes it easier for businesses and their employees to reach agreements that reflect their needs.

"Australia has fallen to 21st on the Global Competitiveness Index, which means less investment, fewer jobs and missed opportunities. With the right mix of policies, including those identified in our Top 10 in 10 plan for a more competitive Australia, we can return to the Top 10."

There were 304 respondents to the Australian Chamber-Westpac Survey of Industrial Trends from across the manufacturing sector. The survey was closed on September 2. 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