ACCI improves, but…

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From Westpac this morning comes the quarterly ACCI Survey of Industrial Trends, which is an excellent survey of industrial conditions that has all but been ignored for the last several years because industry is so yesterday. I predict that in two years this will be one of the most important economic releases in the country.

There was some good news for the September quarter but I agree it is unlikely to last.

The Westpac–ACCI Actual Composite rose to 52.4 in the September quarter from 48.3 in the June quarter. This is the first above-50 reading since the March quarter 2011.

• The Expected Composite also rose in the September quarter to 53.7, from 51.5 three months ago, indicating that respondents anticipate that the modest growth experienced in the September quarter will continue.

• Expectations of ‘general business conditions’ also improved significantly in the September quarter, with a net 11% of respondents now expecting that conditions will improve over the next six months. The expected improvement in broader conditions is driving an expected improvement in profitability, despite margin pressures.

• Away from the outlook and the actual level of activity, remains relatively weak. The Survey’s capacity utilisation measure declined to –27% in the quarter, in net terms, considerably below the long term average of –19%. Further, although the Labour Market Composite improved in the quarter, respondents reported that they had cut their head count in the past three months and expected further cuts in the coming period, while simultaneously increasing overtime to cover the expected expansion in activity. And wages pressures have clearly lessened.

• Investment expectations also remain patchy. Firms reported that they have revised up their plant & machinery investment expectations again. But building investment plans were scaled back for the sixth straight quarter.

• Unit costs continued to rise in the September quarter and are expected to do so again in the coming quarter. In contrast, average selling prices fell in the September quarter. While manufacturers remain hopeful that the price declines are at an end, clearly their profit margins remain under pressure. Nonetheless, after reducing their labour costs and given softer wage expectations, respondents are more optimistic about their profitability – a net 13% of firms expect it to improve.

• Global conditions obviously remain challenging. The high Australian dollar continues to erode competitiveness. Furthermore, global manufacturing surveys have described contracting order books and rising inventories in the months of July and August. While Australian firms experienced a sharp inventory rundown in Q2, ahead of the global shift, which partially explains the disconnect between this survey and the global trend, history argues that it will be very difficult for Australia to stay out of synch for very long.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.