Australian manufacturers will face disruptions in the wake of Japan’s natural disaster while factories there scramble to shift production of hi-tech and auto components.
Last Friday’s earthquake and tsunami in northern Japan hit an area that is a leading producer of the components.
“Japanese firms are going to be frantically trying to relocate activity to other factories, but that is going to be difficult in the very short term,” Westpac senior economist Huw McKay told reporters in Canberra on Thursday.
Mr McKay was co-presenting the latest Westpac-Australian Chamber of Commerce and Industry (ACCI) industrial trends survey which showed a sharp rebound in manufacturing conditions.
However, the survey for the March quarter was taken before Japan’s disaster and intensified political tensions in the Middle East.
Mr McKay says local consumers will feel the impact of Japan’s crisis because manufacturers will find it harder to meet orders from wholesalers who, in turn, will have difficulties meeting their orders from retailers.
While many components will still be coming in from other countries, Mr McKay says he expects the elite end of the Japanese car market will feel the impact as these components are primarily made in Japan.
Still, the latest Westpac-ACCI survey shows manufacturing has recovered smartly from a range of negative factors that dogged the sector in the latter part of 2010.
Worries over a strong Australian dollar, rising interest rates and a housing market slowdown appear to have receded for now.
The survey’s composite index jumped six points to 58.9, a level that points to a strong expansion in the manufacturing sector – being comfortably above the 50 mark – while the expectations survey was even more upbeat.
Mr McKay said it was a “strikingly strong” result, and an element of relief in the readings given the Reserve Bank of Australia (RBA) has now held interest rates steady for some time.Labour market indicators in the survey were strong, while investment intentions in plant and equipment soared.
However, output halved as a result of the flooding in Queensland, though it is expected to bounce back sharply in the June quarter as rebuilding in the state gets under way.
ACCI director of economics and industry policy Greg Evans said that while the survey was encouraging, it still showed there was considerable pressure on selling prices, while average unit costs increased.
“That is going to continue to put pressure on profitability and that would be particularly concerning if we do see interest rate increases in the second half of this year,” Mr Evans told reporters in Canberra.
Despite current financial market volatility as investors fret over the brewing nuclear crisis in Japan, Westpac says it believes the RBA will still raise interest rates in the September quarter.
Mr McKay expects that once Japan – already Australia’s largest market for coking coal and second largest for iron ore – goes into its rebuilding phase there will be rapid demand for raw materials.
“A boost for demand there is going to flow through to Australia’s terms of trade and that is one of the key factors the Reserve Bank is currently focusing on,” he said.