There’s only a few days to go until the 2024 Federal Budget is handed down on 14 May, and something very strange is happening. This year is shaping up to the most manufacturing-centric budget in decades, if not generations.

Last month, the Prime Minister announced the Future Made in Australia (FMIA) strategy. It is an omnibus program of industry policies aimed at supporting local manufacturing, emerging technology and energy transition industries.

Some of elements of the FMIA – including the National Reconstruction Fund (NRF), the Solar SunShot program, and the Critical Minerals Facility – have already been announced. But the Federal Treasurer has promised that many more initiatives to boost local manufacturing will be coming in the budget next week.

It likely comes as quite a surprise to Australian manufacturers to find themselves as the centrepiece industry for a Federal budget! And indeed, we’ve been here before. The NRF, a government-owned bank announced in the October 2022 budget, is still to make its first investment 19 months later.

We will need to wait-and-see on budget night precisely what is coming manufacturing’s way.

In the meantime, it’s worthwhile taking stock of how Australian manufacturing is performing

after the rollercoaster ride of the last five years.

Ai Group Research & Economics recently released our 2024 Australian Manufacturing Performance Report. It provides a comprehensive analysis of the production, employment, investment, and profits trends facing the industry.

While we wait for the manufacturing-themed budget, we wanted to share with you five key findings from the report – and we think they might surprise you. The death of Australian manufacturing is greatly exaggerated.

Australian manufacturing performed strongly coming out of the pandemic

In 2023, the manufacturing sector contributed $124 billion of value-add to the Australian economy. It’s not well known, but this makes it Australia’s sixth largest industry – bigger than agriculture, retail or education – and accounting for 5% of our GDP.

Manufacturing also performed strongly coming out of the pandemic. Like most ‘physical’ industries, manufacturing output fell markedly in 2020 as lockdowns forced factory closures. But the industry roared back to life in 2021 and 2022, as local manufacturers ramped up to meet gaps created during the global supply chain crisis.

And the industry has continued its momentum into the post-pandemic period, with manufacturing growing 2.8% in real (inflation adjusted) terms last year. Australian manufacturing output in 2023 was higher than at any point since the GFC.

The composition of Australian manufacturing is shifting up the value chain

While Australian manufacturing has grown in overall terms, there has been marked changes to the composition of the industry during and since the pandemic.

Since 2019, a clear trend is apparent in the industry: a decline in the “heavy” petrochemicals and metals branches, alongside significant growth in food & beverage and machinery & equipment.

On the downside, this reflects the impacts of record-level energy prices during 2022. Heavy manufacturers in petrochemicals and metals had their performance dented due to high input costs.

On the upside, the food and machinery industries made up the difference, and were not seriously impacted by either the pandemic or high energy prices. These are both IP-intensive branches of manufacturing, which are positioned at higher value-added positions in the value chain.

The Australian manufacturing industry that emerged from the pandemic is quite different – and higher up the value chain – than the one we went in with.

So the business performance of Australian manufacturers has improved significantly

This post-pandemic move up the value chain is also reflected in improved financial performance from Australian manufacturers.

In 2023, the average estimated operating margin for Australian manufacturing was 11.3%. This marks a dramatic improvement from a decade ago, when manufacturer margins were a paltry 7.8%.

To be sure, there has been an improvement in business margins across all industries since the pandemic. This was initially due to business support measures (like JobKeeper in 2020), followed by the relatively buoyant economic conditions of 2022.

But manufacturing has improved its performance more than its peer industries. Manufacturing went into the pandemic with margins about 1% less than the all-industry average but has outperformed and now has margins 0.3% higher.

While high inflation over the last two years has put pressure on margins in many industries, Australian manufacturers have largely been able to defend against this pressure.

Which has unleashed a wave of new manufacturing investment

Growth, movement up the value chain and stronger margins have all combined to unleash a wave of new manufacturing investments.

Australian manufacturers undertook $15 billion worth of new capital expenditure in 2023. Behind the mining industry (at $51 billion), manufacturing had the second highest capex of any Australian industry, and accounted for 11% of the national total.

Manufacturing is today one of the most capex intensive industries in Australia, and generates twice as much capex per dollar of value-add as the national average.

But it wasn’t always thus. Since the start of 2019, quarterly capex levels in the manufacturing industry have soared by 77%. By comparison, the all-industry capex level has also increased over the same period, but only by 25%.

And the uptick in manufacturing investment wasn’t a temporary phenomenon associated with global supply chain crisis in 2022. Growth in capex continued steadily and strongly in 2023, and continues to pull ahead of the all-industry figures.

There is clearly strong momentum behind private sector investments into Australian manufacturing, before the National Reconstruction Fund has committed its first dollar.

But has left the manufacturing industry disastrously short of staff

The downside to this uptick in growth and investment has been acute labour shortages afflicting manufacturing.

In the December quarter of 2023, there were 23,000 vacant manufacturing jobs in Australia – leaving approximately 2.4% of all jobs unfilled.

While manufacturing vacancies have fallen since a peak in 2022, they still remain very high. The current vacancy rate is approximately double the normal rate (1.3%) which would be expected due to routine job turnovers.

This suggests the manufacturing industry currently has around 12,000 open jobs that should have but cannot be filled. 

These labour shortages have a material impact on the industry’s performance. In February 2024, one-in-five manufacturers report having vacancies with an operational impact.

What does this mean for our manufacturing-centric budget?

Australian manufacturers will be cheered by the fact their industry is going to be the centrepiece of this year’s Federal budget. But they should also expect that government makes policies which address the actual impacts being felt by the industry.

While we have to wait for next Tuesday night to see what we get, this data has some clear lessons for government in how to design support for manufacturing.

First – and contrary to popular belief – Australian manufacturing is not a declining industry which needs to be brought back from the dead. Manufacturers have navigated the challenges of the pandemic, and emerged stronger and with a positive investment orientation. Government needs to work with this dynamism.

Second, Australian manufacturing has changed over the last five years. Energy-intensive heavy industries have struggled while light IP-intensive industries have grown. As both sides are important, government needs to offer distinct forms of support for each. A one-size-fits-all manufacturing policy is likely to be one-size-fits-none.

Third, its all about workforce. Output, margins and investment are all up, but labour shortages are holding our growth prospects back. We shouldn’t be promoting investment in new manufacturing jobs without a plan to fill the jobs we already have sitting empty. Fixing the skills pipeline will be as, if not more, important than investment incentives.

Ai Group will release our detailed coverage of the 2024 Federal Budget on Wednesday 15 May.

Dr Jeffrey Wilson

Dr Jeffrey Wilson is Ai Group's Director of Research and Economics. He leads our economics team, and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities. He specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.