Manufacturing outlook grim

Wage concerns and high dollar weigh on business

Sentiment among local manufacturers has fallen noticeably, as concerns over rising staffing costs and the high Australian dollar dampen the sector's sales and profit expectations, according to the latest Dun & Bradstreet National Business Expectations Survey.

The survey found half of non-durables manufacturers, up from a third in May, expect the high local dollar to have a negative impact on their business in the September quarter. While 37 per cent expect wages growth to have the biggest affect on operations - up seven percentage points.

This has prompted industry executives to downgrade sales and profit projections, with non-durables manufacturers' sales expectations falling 16 points to an index of 20 and profit projections falling two points to an index of nine. Durables manufacturers are similarly pessimistic about sales (down 18 to 1) and profits (down 16 to -1) for the coming months.

According to Dun & Bradstreet CEO, Gareth Jones, the decision to raise the national minimum wage is impacting sentiment amongst manufacturers, who are already struggling under an elevated exchange rate.

"Together with pressure from the consistently high Australian dollar, wages pressure is impacting on executives' outlook and as a consequence businesses will be less willing to focus on long-term growth, including staff investment." said Mr Jones.  

Employment plans among non-durables manufacturers fell 10 points to an index of 0, the lowest point in 12 months. Manufacturers are also curbing other long-term investment plans, as they prepare for slowing demand in the year ahead.

Fifty-seven per cent of non-durables manufacturers expect sluggish growth in product orders to be the biggest barrier to operations, up from 44 per cent in May. Consequently, non-durables manufacturers' plans for capital investment (down 11 points to 6), inventory levels (down 5 points to 2) and selling prices (down 15 points to 7) also fell. 

As non-durables manufacturers downgrade their expectations for the coming quarter, concern over rising staffing costs and the local dollar is likewise contributing to a conservative outlook among retailers. Two-thirds (64%) of retailers expect slowing demand to affect operations in the year ahead.

Expected Sales, Profits, Employment, Inventories & Capital Investment Indices

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As with manufacturers, thirty per cent of retail executives also expect wages growth to have the biggest impact on operations in the coming quarter, up from 20 per cent in May, while over a third expect the elevated exchange rate to have a negative impact on business.

Industry expectations prompted a profit downgrade among retailers,  moving further into negative territory from -1 to -9, as plans for employment (down 5 points to -1), inventories (down 6 points to -8) and selling prices (down 2 points to 13) among retail firms were also downgraded.

"Australian consumers' conservative attitude is impacting retailers, who are attempting widespread discounting in order to shift stagnant stock. D&B's latest consumer survey found over half of consumers are less willing to spend money on non-essentials compared with 12 months ago, while willingness to save grows.

"This has a noticeable knock-on effect to the consumer-driven industries at each point in the supply chain and as conditions remain difficult, businesses will need to refocus on the fundamentals of good cash-flow management in order to survive," said Mr Jones.

Overall, sales expectations across all firms fell to the lowest level in 12 quarters, down 11 index points to nine, while profit projections fell six index points to two. Likewise, employment, capital investment, inventories and selling price expectations have fallen compared with the June quarter.

According to Dr Duncan Ironmonger, Dun & Bradstreet's economic consultant, the latest ABS national accounts confirm business executives' concerns about rising labour costs. These show that real unit labour costs in March quarter 2012 were the highest in more than two years with a rise of 1.9 percent in the last 12 months.

"The ABS accounts also show the relative and absolute plight of the Australian manufacturing industry. In the year to March quarter 2012 trend real growth in mining was 9.2 percent, agriculture 6.4 percent and wholesale trade 5.6 percent. However manufacturing growth was a negative 0.3 percent with non-durables products the main contributor," Dr Ironmonger said.

*D&B Australasia conducted the latest Business Expectations Survey in June 2012 involving 400 businesses. Each quarter 1,200 (400 per month) business owners and senior executives representing major industry sectors across Australia are asked if they expect increases, decreases or no changes in their upcoming quarterly Sales, Profits, Employment, Capital Investment, Inventories and Selling Prices.

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