Aussie dollar and rising costs continue to cripple manufacturers

The strength of the Australian dollar and rising production costs continue to hurt Australian manufacturers, according to a report by Westpac and the Australian Chamber of Commerce and Industry.

The latest ACCI-Westpac Survey of Industrial Trends, which looks at industry trends for the June quarter, reveals the outlook is mixed for manufacturers as external factors increasingly dictate their operations.

Greg Evans, ACCI director of economics and industry policy, says while the overall prospects for the June quarter remain positive, activity indicators and growth expectations have slowed significantly compared to just three months ago.

“Escalating concerns over the strength of the Australian dollar, the imposition of new taxes, soft demand from the household sector, and global political and economic uncertainties are dampening demand,” Evans says.

“The high exchange rate is exerting an increasingly negative pressure on exports of manufactured products.”

“Profit expectations have also slumped due to the squeeze on profit margins, with manufacturers facing rising production costs but unable to recover these cost increases by raising prices.”

Evans says the unusually strong outcomes in the March quarter have resulted in overly optimistic expectations “and we are now facing a correction.”

The Westpac-ACCI Actual Composite Index fell to 48.9 points in June, from 59.1 in March. The index is now 9% below the average level in 2010, but 14% above the average level in 2009.

Meanwhile, the Expected Composite Index fell by 11.8 points, from 65.1 in March to 53.3 in June. It is now 5% below the average in 2010 but is consistent with expectations of a modest expansion.

Westpac chief economist Bill Evans agrees the unexpectedly strong results recorded in the March quarter have been unwound in “spectacular fashion”.

“This is a combination of excessive optimism in March and clearly weak conditions in June, largely stemming from a further 5-7% jump in the Australian dollar, soft conditions in the household sector and ongoing concerns about the world economy,” he says.

“Consistent with the high Australian dollar, exports slumped, recording their lowest read since the June quarter in 2009.”

“Labour demand has also softened. Whereas the March print of the Labour Market Composite was 10.3, it has now fallen to 0.8.”

“That level is below the average for 2010 of 3.8 but is still consistent with trend employment growth in the second half of 2011.”

“The concern for the labour market is that other leading indicators are also turning, including Westpac’s Index of Unemployment Expectations and an index of job advertisements.”

Evans says while employers remain concerned about wage pressures, they are yet to see a tighter employment market, which points to wage restraint.