Tailwinds give manufacturers reasons to smile
Australia’s manufacturers have capped off a year of improved performance, as increased spending on infrastructure provides support but rising energy costs take their toll, the June-quarter Australian Chamber-Westpac Survey of Industrial Trends has found.
Andrew Hanlan, Senior Economist at Westpac, said:
"The Westpac-AusChamber Actual Composite index strengthened in the June quarter, rising 1.8 points to 65.0, extending the rebound from a dip to 55.1 a year ago, just before the federal election.
"The above-par reading for the Composite index, which has trended higher since 2014, reflects strength across output, new orders, overtime and employment. Output improved significantly in the quarter, matching the strength in new orders.
"Manufacturing is benefitting from several factors, including increased state spending on infrastructure, stronger world growth, spillover effects from a positive income shock to mining and agriculture, an increase in international competitiveness due to a lower currency, recent gains in commercial construction and an upswing in home building.
"Even so, there are some negatives: consumer spending is constrained by slow wage growth, energy costs are up and overseas competition is intense.
"The modest uptrend in exports has resumed after stumbling in 2016, with a net 12 per cent of firms reporting a rise in export deliveries. Export expectations are modestly positive, supported by a lower Australian dollar and a rise in world trade volumes after a long period of contraction, though restricted by international pressures.
"More broadly, expectations are positive, centred on new orders, output and employment. The Expected Composite index is at 65.9 points in the June quarter, up 2.1 points from the March quarter. A net 28 per cent expect the general business environment to strengthen over the next six months, an upbeat mood, but not as optimistic as March's 37 per cent.
"Businesses continue to anticipate a positive year for profits, driven by rising turnover and a lower Australian dollar boosting export returns. A net 33 per cent expect profits to rise in the coming 12 months.
"Equipment investment intentions have been positive in recent years, consistent with some reduction in the manufacturing sector's spare capacity and improving profitability. A net 23 per cent expect to increase equipment spending in the next year, while building investment intentions are mildly positive, at a net 9 per cent of firms.
"The survey's Labour Market Composite, which broadly tracks economy-wide jobs growth, was 58.4 points in June, pointing to robust jobs momentum through 2017."
James Pearson, CEO of the Australian Chamber of Commerce and Industry, said:
"The latest Australian Chamber-Westpac Survey of Industrial Trends shows the resilience of Australian manufacturing businesses.
"The global economy is providing tailwinds that are giving our manufacturers support, and business operators are making the most of these opportunities.
"But that same global economy brings with it intense competition, and our firms cannot rely on exchange rates or the fortunes of mining and agriculture for success. We need domestic policies that help local firms to compete.
"That's why the surge in energy prices is such a worry. Australia has an abundance of natural energy resources – coal, gas, sunlight, water and wind – so it represents a serious policy failure that energy costs are rising rapidly.
"Last week's Finkel Review offers a blueprint for an energy future by spelling out a plan to achieve more reliable energy while meeting our international greenhouse gas obligations and putting downward pressure on prices.
"Now we need politicians of all sides to set aside ideological baggage and reach an agreement that provides certainty for the future.
"It is essential that investors have confidence in policy settings to encourage investment in energy projects. Otherwise the unwelcome rises in input costs for manufacturers that are flagged in this survey will continue."
There were 255 respondents to the Australian Chamber-Westpac Survey of Industrial Trends from across the manufacturing sector. The survey was closed on June 5, 2017. 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.
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