Australia | Mar 19 2009
By Chris Shaw
Signs are increasing the Australian manufacturing sector is finding the going even tougher as the latest Westpac-ACCI Survey of Industrial Trends showed a further fall in the March quarter.
The composite index came in at a reading of 34, down from 40.4 in the December quarter and well below its decade average of 52.7, with the bank’s senior economist Anthony Thompson noting the index is now at levels last seen during the recession of 1990/91.
Thompson points out the current level of the index is consistent with a sharper contraction in manufacturing activity in the current quarter, reflecting both weaker global growth and trade plus a further weakening in domestic demand levels.
While the downward trend in the index has been maintained in the latest survey, one significant change was no further collapse in expectations, which Thompson suggests shows there is currently no evidence conditions are worsening beyond those experienced in the last recession.
General business sentiment was also unchanged at a reading of minus 61%, Thompson noting this measure remains at its lowest level for more than 18 years. The survey results show respondents expect similarly weak outcomes in the June quarter survey.
Elsewhere, labour demand has fallen sharply with the survey showing the labour market net composite measure falling 17 points to a reading of minus 33. This implies a rapid fall in jobs growth and in Thompson’s view is consistent with the unemployment rate rising to more than 8%.
Thompson doesn’t expect the labour market will deteriorate to this extent however, seeing jobs growth deteriorating at around 1.5% by late this year and early in 2010. This suggests unemployment of 6.8% by year’s end and above 7% in the first months of next year.
The weak demand for labour fits in with falling capacity utilisation levels, which over the past two quarters have fallen at their fastest rate since the first half of 1990. With high levels of concern remaining over the availability of finance, corporate investment plans are also now at their lowest levels since the 1982/83 recession.
As an example of how tight credit market conditions have become, Thompson notes 40% of respondents in the current survey saw finance as harder to get, which compares to an average of 9% for the current decade. Seven percent of respondents said the inability to obtain finance was the main reason preventing them from increasing production. This is the highest level for this measure since the final quarter of 1974.
The one silver lining in the data according to Thompson, was a further easing in manufacturing price pressures as this suggests inflation will be no impediment to the Reserve Bank of Australia continuing to cut rates to support the economy.
Cost pressures are predicted to fall further in the June quarter, but as Thompson notes selling price expectations continue to deteriorate more rapidly, meaning corporate profit margins in Australia will remain under pressure in the coming months.