Economy poised between crash and cure

Manufacturers are viewing the economy as at a delicate point between point between boom and bust, according to the ACCI-Westpac Business Survey December 2024 Q4.

Currently spot on the breakeven threshold, the latest survey shows manufacturers are experiencing a torrid time, but have expectations of far better times ahead.

Could this be from pent-up demand manufacturers expect to be unleashed when interest rates start to fall as expected in 2025?

Growth in new orders moderated sharply as the year drew to a close, with a net five percent reporting a decline in December, following solid growth over June and September.

According to Westpac economist Ryan Wells, output growth remained positive over the same period, with a net six percent of firms reporting an increase, suggesting firms were able to work down order backlogs and build up stock.

Wells said: “In response to the latest decline in new orders, manufacturers pulled back on their use of overtime in December, with a net 9 percent of firms reporting a decline, broadly in line with manufacturers' own expectations from the previous quarter.

“Encouragingly, manufacturers expect this ‘soft patch' to be relatively short-lived.

“The Expected Composite lifted from 53.3 in September to 57.4 in December, the highest level since September 2022, reflecting a much greater degree of optimism around the outlook for demand and output.

“That a net 5 percent of firms reported an increase in head count in December – following two years of flat-to-weak growth – suggests manufacturers are seeking to increase the size of their work force in anticipation of an expected recovery in demand over the period ahead.”

The Westpac-ACCI Actual Composite had lost some momentum during the final months of the year, easing from a reading of 55.3 in September to 50.0 in December.

However th recent optimism was also reflected by the considerable improvement in the mood about the general business outlook for the next six months.

The number of firms expecting an improvement outnumbered those expecting a deterioration by a net two percent in December, the first positive reading since September 2022 during the reopening ‘burst' of activity.

“Manufacturers still face a broad set of challenges, however.

“Cost pressures facing manufacturers continued to ease but remained elevated into year-end, with a net 34 percent of firms reporting an increase in average unit costs.

“Smoothing recent volatility, year-average measures of unit costs are tracking a very gradual downtrend, from a net 54 percent in Q3 to a net 46 percent in Q3, still well above the pre-pandemic ‘norm' of a net 19 percent.”

However manufacturers have little scope to pass on rising costs to consumers, with a net 19 percent reporting a rise in prices.

That is below the net proportion of firms that reported an increase in costs over the same period, implying margins continue to be squeezed to some extent.

Encouragingly, is notable that the gap between these measures has fallen back to around average levels, suggesting the breadth of margin squeeze across the industry is returning to its ‘norms'.

Picture: Westpac/thought leadership