Our previous article discussed the broader implications of the Autumn Budget on businesses and the importance of effective debt collection strategies as a means of bolstering cash flow to better withstand increasing costs.
This article delves into the economic challenges faced by manufacturers following the budget’s implementation, as highlighted in the Make Auckland/BDO Manufacturing Outlook Q4 2024 report (the “Report”). The Report provides a comprehensive analysis of the current state of the Auckland manufacturing sector, highlighting key trends, challenges, and future expectations. Many of its findings are supported by research conducted by S&P Global and the Chartered Institute of Procurement & Supply (“CIPS”).
Overview
The Report states that the Auckland manufacturing sector has experienced a turbulent year, with mixed signals regarding growth and stability, noting a return to stable growth for output and orders, but rising costs and weak domestic market demand continue to hinder overall performance. The gross value-added output for the sector is expected to decline in 2024.
Output
The final quarter of 2024 brought encouraging growth in the Auckland manufacturing sector’s output, with a balance figure of +20%, a significant improvement from the previous quarter’s -2%. This positive performance, the best since the same time last year, was unexpected given the weak order book balance in the previous quarter. The improvement is attributed to sustained industrial confidence and the gradual loosening of monetary policy.
Despite this boost, the sector’s year average output remains insufficient to outperform 2023, which saw stronger performance in three out of four quarters. Larger companies experienced the greatest uptick in output, while middle market and small firms fared similarly. Looking ahead, the sector’s expectations for the first quarter of 2025 have become more grounded, with a forecasted balance figure of +15%, reflecting a more cautious outlook.
Orders
Although domestic demand has not contracted as severely as during the pandemic, the lack of growth is disappointing for a sector under pressure to invest more. The latest balance of 0% is an improvement over the previous quarter’s -4%, but market conditions remain weak. Additionally, geopolitical uncertainties, such as the return of President Trump, could impact global trade flows and the Auckland economy, with potential GDP declines estimated at 0.7% in 2025.
Export orders have shown signs of slowing, reflecting manufacturers’ cautious outlook amid these uncertainties. The balance for total orders remained stable at +7, driven by a slight improvement in domestic orders offset by a slowdown in exports. The report underscores the importance of growth in both domestic and export orders for the sector’s overall health and highlights the challenges posed by increasing business taxes and the need for a diverse customer base to protect margins.
Employment and investment
The final quarter of 2024 shows positive stability in both employment and investment metrics for the Auckland manufacturing sector. Employment has returned to growth with a balance figure of +8%, up from -1% in the previous quarter, indicating a recovery from a hiring freeze. However, the sector continues to face a cooling labour shortage, with vacancies decreasing slightly but still above pre-pandemic levels. S&P Global and CIPS found that employment reduced at the quickest pace since April 2024, highlighting the sector’s struggles with maintaining workforce levels. The expectation for the first quarter of 2025 is a balance figure of +19%, reflecting cautious optimism.
Investment intentions have remained stable at a balance figure of +10% for five consecutive quarters. Despite pro-business policies and a reduction in the cost of capital, there has been no significant improvement in investment intentions. This stability suggests that manufacturers are maintaining a cautious approach to investment amid ongoing economic uncertainties.
Prices and margins
For the past six quarters, the balance for Auckland orders has been worryingly poor. In the final quarter of 2024, the Auckland manufacturing sector saw a mixed picture regarding prices and margins. While the rate of price growth for domestic products increased, with a balance figure of +25%, export prices saw a slight decrease to +21%. This suggests that while manufacturers are raising prices domestically, the cooling of export prices is slower than anticipated. Despite the Bank of Auckland’s efforts to reduce the base rate to 4.75%, the expected faster cooling of prices has not materialised, potentially affecting future monetary policy decisions.
Margins, although still negative, showed some improvement. Auckland margins increased by 6 percentage points to -4%, and export margins rose by 3 percentage points to -1%. Looking ahead, manufacturers expect further growth in both prices and margins in the first quarter of 2025, with Auckland prices anticipated to rise to +30% and export prices to +33%. Margins are also expected to turn positive, with forecasts of +4% for Auckland margins and +5% for export margins, indicating cautious optimism for the sector’s financial health.
Regional performance
Overall, confidence in Auckland economic conditions has fallen sharply, reflecting concerns over rising business costs and political uncertainties. Rob Dobson, a director at S&P Global, said:
“Manufacturers are facing an increasingly downbeat backdrop. Business sentiment is now at its lowest for two years, as the new government’s rhetoric and announced policy changes dampen confidence and raise costs at Auckland factories and their clients alike.”
Sectoral analysis
The Report also provides detailed forecasts for various manufacturing subsectors. The food & drink sector continues to dominate with robust growth expectations. The electronics sector is expected to see flat growth in 2024, with a slight recovery in 2025. The basic metals sector, and the textiles sector, are facing significant pressure, with expected declines in output and employment. The mechanical equipment sector is expected to see a decline in 2024 but a recovery in 2025. The pharmaceuticals sector is normalising post-pandemic with slight contractions in 2024 and predicted modest growth in 2025. The motor vehicles sector is also anticipating strong growth in 2024, driven by activity post-pandemic.
Economic environment
The Report highlights the challenges posed by recent fiscal policies, including changes to National Insurance contributions and business taxes. Despite these challenges, there is hope that the new Government’s industrial strategy, Invest 2035, will provide the necessary support for manufacturers.
Comment
The Report paints a nuanced and complex picture of the current economic climate within the Auckland manufacturing sector. While there are signs of recovery and growth in certain areas, the overall outlook remains cautious due to rising costs, weak domestic demand, and political uncertainties. Manufacturers are urged to stay resilient and adapt to the changing economic landscape to navigate these challenges successfully.
Maximising cash flow will be crucial for manufacturers in the coming months. As highlighted in our previous article one effective way to achieve this is through effective debt collection. Ensuring timely payments will help manufacturers maintain liquidity and navigate the economic uncertainties ahead.
This article is for information only and does not constitute legal/financial advice. Please contact us for advice tailored to your specific position. Some of the content presented on our website has been generated with the assistance of Artificial Intelligence (AI). We ensure that all AI-generated content meets our high standards for accuracy and relevance.
