Australian manufacturers brace for weaker conditions despite US-Iran peace deal

Manufacturers are bracing for weaker conditions despite Donald Trump declaring a US-Iran peace deal the industry hopes will lead to lower fuel and energy costs.

But a senior economist warned oil prices would remain elevated until the end of next year.

Just hours before the Reserve Bank kept rates on hold on Tuesday, a new survey by Westpac and the Australian Chamber of Commerce and industry revealed a deterioration in business conditions in manufacturing and a steep decline in confidence in the June quarter.

ACCI chief of policy and advocacy David Alexander attributed the gloomy outlook to cost pressures — majority of which stemmed from the Iran war that triggered a fuel crisis — as well as the impacts of the RBA’s three consecutive rate hikes earlier this year.

The survey revealed growth in new orders effectively evaporated in the second quarter, with only one per cent of respondents reporting an increase.

Against a backdrop of cooling demand and an earlier build-up on inventories, production slowed considerably in the quarter with 6 per cent of firms reporting an increase in output. This was substantially down from 27 per cent earlier this year.

While he welcomed Mr Trump’s ceasefire with Iran that promised to end the Middle East war after more than three months of conflict, Mr Alexander said local manufacturers continued to battle with other challenges.

These included wage increases, payday super, and proposed changes to capital gains tax.

“We’re heartened by the Persian Gulf deal that seems to have been struck and we hope that that leads to reduction in fuel costs, energy costs that will flow through,” Mr Alexander said.

“That should be a good development. (But) there are some other things going on.”

Last week, Westpac chief economist Luci Ellis warned the RBA was still likely to hike rates this year — in August and September — given inflation remained too high.

Westpac senior economist Pat Bustamante on Tuesday said this was on the back of the outlook for imported inflation.

“Even with the truce, we’re still expecting oil prices to remain elevated to the end of 2027,” he said.

“It’s got a long tail. So our forecast advice is returning to where they were pre-conflict by the end of 2027.

“That’s just going to increase pressures across the economy as well. So we think that that could potentially feed into inflation expectations becoming unanchored add to it.”

Mr Bustamante said the stronger-than-expected wage increase could also add to inflationary pressures.

Dr Ellis’ view about the RBA’s future rate trajectory is opposite to those of economists at HSBC and ANZ, who have tipped the institution’s next move to be cuts. NAB economists last week week tipped cuts were the next likely move.

If correct, two more interest rate hikes would push the cash rate to 4.85 per cent — an 18-year high.

Dr Ellis, a former RBA assistant governor, said recent inflation and labour market data had been mixed, which supported the case for a hold on Tuesday.