With covid lockdowns now behind us, economic activity in Australia, particularly in the manufacturing sector, is gathering pace and momentum once again. The Ai Group Australian Performance of Manufacturing Index (PMI) has been registering consistent gains, reaching 55.7 points in March - a result that was last achieved in July of 2021. As explained by Ai Group chief executive Innes Willox, manufacturers are adding new staff and expanding production in response to an increase in sales and orders.

Due to this rapid growth over the past few months, the industry began to experience significant pressures and delays in its supply chains. Major trade ports and routes were faced with extended delays and queues (having remained closed for long periods due to covid lockdowns), along with massive container shortages because of the sudden increase in demand generated by the resumption of economic activity.

Although the situation improved slightly in February, Australian manufacturers are now facing the unpleasant prospect of reduced profits because of an increase in labour and input costs. For March, the PMI for input prices rose by 6.8 points to 82.4 while the wages index grew by 1.7 points to 66.6.

The rise in input costs can be attributed to a global increase in the cost of fuel and other commodities (such as metals that serve as raw materials in manufacturing), along with higher costs associated with importing supplies to Australia via sea freight. At the same time, rising inflation and a greater demand for skilled labour are putting upward pressure on wages in the industry.

The only silver lining here is that selling prices are also consistently rising, with the index climbing 0.4 points to reach 72.0. This means that manufacturers are able to offset the increase in input and labour costs by transferring some of that cost to customers and expanding their profit margins.

New challenges ahead

Looking forward, the Russian invasion of Ukraine has created new challenges for many countries including Australia. Russia has been a major exporter of energy and food around the world, so the trade sanctions imposed on it by Australia and other allies of Ukraine are bound to cause more disruptions in global supply chains and further increase fuel prices in the international market. 

Moreover, if Russia’s invasion emboldens China to increase its aggression toward Taiwan, sanctions will likely be imposed on China as well. This could mean even more problems for Australian manufacturers who source raw materials and other intermediate goods from China.

The government’s efforts to increase resilience

The Australian government is taking steps to ensure that the country is self-reliant and that the manufacturing sector is better able to handle disruptions in global supply chains. The Federal Budget 2022-2023 was recently announced with the aim to grow a ‘modern and resilient’ manufacturing industry, with Josh Frydenberg, Treasurer of Australia, pointing to the events in Ukraine serving as a ‘powerful reminder that we must increase our self-reliance.’ 

In line with this, the budget outlines funding of $1 billion in new investment to secure supply chains and jobs in a period of heightened global uncertainty for the manufacturing industry, along with an additional $200 million funding as part of the Regional Accelerator Program to strengthen sovereign manufacturing capability.

With the vision of a ‘globalized’ economy beginning to recede in most parts of the world, it is crucial for Australia to build a foundation of resilience against supply chain disruptions. The investments announced for the manufacturing sector in the federal budget constitute positive steps forward in that direction.

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