Manufacturing sector shows signs of life but cost pressures remain

Australian manufacturers have notched up a better few months for new orders and tax cuts should help household incomes recover and underpin healthier demand for goods.

Demand has rebounded in the June quarter, with a net 20% of firms recording a rise in new orders.

This was after new orders stalled in the second half of 2023 and then declined at the start of this year as retailers struggled to move stock due to higher interest rates and price pressures weighing on consumers.

Westpac economist Ryan Wells said conditions in the manufacturing survey were improving, as highlighted in the quarterly survey from the major bank and the Australian Chamber of Commerce and Industry.

“The broader economic backdrop for manufacturers has been challenging over the past year, highlighted by stalling new orders growth,” Wells said.

Tax cuts, due to kick in from July 1, should help support household incomes and keep demand recovering in the second half of 2024.

Manufacturers are not out of the woods, however, with the survey picking up enduring labour shortages and still “acute” cost pressures.

A net 71% of firms reported a rise in average unit costs, which was the highest outcome since peaking back in December 2022.

Inflation peaked at the end of that year, growing 7.8% annually and has since simmered down to 3.6% in the 12 months to March.

Despite the progress on consumer price growth, it remains above the two to three percent range targeted by the Reserve Bank of Australia (RBA).

After receding convincingly in the second half of 2023, slowing progress on inflation left the central bank uneasy at its interest rate meeting last week.

While interest rates remained on hold at 4.35% at the June meeting, economists say the RBA board will need to be more confident inflation is coming back to target before cutting rates.

An inflation update is due from the Australian Bureau of Statistics on Wednesday for the month of May.

Commonwealth Bank economists were predicting the annual growth rate to shift higher again over the month due to unfavourable base effects, but a weaker result on a monthly basis.

May inflation data should be 0.3% lower on a monthly basis but lift to 3.7% from 3.6%, they forecasted.

This article was first published by AAP.

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