The last twelve months have been a very difficult time to be in Australian manufacturing. After two years of healthy growth following the pandemic, business conditions took a sudden turn for the worse. The industry entered recession around the middle of 2024, and contracted 2.6% over the last year. While weak economic conditions in Australia have proven difficult for most industries, manufacturing has declined faster and further than any of its peers.
Given the contribution of manufacturing to the Australian economy, this should be a cause for concern to many. It is the sixth largest industry in Australia, producing $137 billion of output while employing 930,000 people. It generated 12.4% of Australia’s exports and 7.9% of our capex investment in 2024, despite being only 5.1% of GDP. It is our most R&D intensive industry (reinvesting 4.1% of value-added back into R&D), and our most innovative industry when it comes to new product development.
The economic impacts of the manufacturing recession go much further than the industry itself. The outsized contribution to exports, investment, R&D and innovation mean that a weak manufacturing industry will drag on our national aspirations to be a high-tech and high-productivity economy.
Why have times suddenly become so hard for Australian manufacturers? This research note explores the emerging pressures weighing on the industry. Drawing on data from the Australian Industry Group’s annual Manufacturing Performance and Outlook report, it identifies four factors – energy costs, skills shortages, trade risks and productivity difficulties – which have combined to drive manufacturing into recession.
While this research doesn’t immediately make for happy reading, it does point the way forwards towards recovery and growth. The issues afflicting the industry are the same that will animate the national Economic Reform Roundtable, which is being convened by the Federal Treasurer in August. By focusing reform attention on the issues of energy, workforce, productivity and international competitiveness, the Roundtable can begin the policy reform agenda needed to put manufacturing on a clear growth path.
Australian manufacturing has experienced very volatile conditions in the past five years. Like many industrial sectors, it was badly impacted by the public health restrictions of the COVID period. But following the pandemic, a strong rebound in Australia’s economy coupled with supply chain disruptions greatly increased the demand for manufactured goods. Manufacturing output surged by around 10% in 2022 to meet this demand, while employment expanded by 7% - its first proper workforce growth in over twenty years.
However, in 2024 conditions in manufacturing rapidly deteriorated. The sluggish Australian economy weighed heavily on local demand, while the restoration of global supply chains saw imports return and put downward pressure on prices. The industry fell into recession during the middle of 2024, and has contracted by 2.6% over the last year. Most branches of manufacturing have been affected, with only the food and beverage subindustry managing to eke out a weak 1.0% growth rate.
While growth in the Australian economy is currently very weak, manufacturing stands out as facing particular difficulties. It had the second worst performance of any industry over the last year, with only mining weaker due to lower global mineral prices. It is faring much worse than its allied industrial sectors – construction, wholesale trade, transport and utilities. It is even performing worse than consumer sectors such as retail and accommodation & food, which are struggling with weak household spending.
Why has Australia’s manufacturing performance suddenly crashed, and crashed so badly? Cost pressures, workforce shortages and trade risks provide the answer.
One of the major pressures has been industrial inflation, with manufacturing experiencing some of the highest impacts of any industry in Australia.
In the five years since the pandemic, manufacturer input prices have risen by an astonishing 37.5%. This outpaced both the growth in Australian industrial prices (20.0%) and consumer prices (22.2%) across the same time.
These pressures began during the latter half of the pandemic, when global supply chain disruptions saw shortages of many manufactured goods. Intermediate products that Australia imports – including metals, chemicals and electrical equipment – were badly affected.
Then in 2022, Russia’s invasion of Ukraine saw global energy prices skyrocket. While electricity prices were mostly unaffected, local gas prices rose dramatically due to price linkages with the export LNG sector. Within a year the gas prices paid by manufacturers had increased by nearly 50%. And despite a subsequent easing in global energy markets, local gas prices are yet to materially come down. Australian manufacturers are currently paying 48% more for gas than they were in 2019.
These problems are particularly acute in the ‘heavy’ branches of manufacturing – particularly metals and petrochemicals – which rely on gas. These manufacturers consume around half of Australia’s domestic gas supply, and their need for heat and chemical feedstocks cannot be substituted for lower cost electricity supply. Surging energy costs must often be borne on the balance sheet, greatly reducing the profitability of energy-intensive branches of manufacturing.
Unlike most industries in Australia, manufacturing is highly trade exposed – either via export orientation in high value products, or competition with imports in the local market. This means prices are largely set in global markets, and rapid cost increases can be difficult to pass on.
Shortages of skilled labour have compounded the financial pressures from rising input and energy costs. While workforce shortages have been universally difficult for many Australian industries, the unique skill needs of manufacturing has made the challenge especially acute for the industry.
One of the best ways to measure skills shortages is via data on recruitment difficulty – the proportion of advertised jobs which are unfilled. Rates of recruitment difficulty soared in Australia after the pandemic, as the economic rebound ran into workforce shortages arising from Australia’s closed border. In the middle of 2022 employers were having difficulties filling 72% of all advertised jobs, with every occupational group affected.
As the labour market started easing in 2024, rates of recruitment difficulty have begun to return to normal. By the middle of 2025, the national rate had fallen back to 45%. However, two higher skilled occupational groups continue to have very high rates. These are technical and trades roles (61% difficulty) and professionals (51%). These ongoing shortages reflect the distinct skills requirements for these roles, and the long training lead times necessary to bring new personnel into the workforce.
The persistence of workforce shortages in higher skilled occupations is a particular challenge for the industry. Technicians and trades account for 28% of the manufacturing workforce, a considerably higher rate than the 12% for the total economy. Many critical occupations – including machinists, mechanics, steel fabricators, and industrial, electrical, electronics, mechanical and chemical engineers – are currently classified as in shortage on the national Occupational Shortage List.
The outlook for manufacturing in 2025 is also clouded by risks emanating from global conflicts over trade. The extensive tariffs imposed by the US against many countries – particularly China – poses a complex set of risks for Australian manufacturers of all kinds.
The first and most direct risk is from US tariffs themselves. It has a levied a 10% “baseline” tariff against all goods, 50% tariffs on steel and aluminium products, and is currently negotiating “reciprocal” tariffs against countries which run a trade deficit with the US. Though Australia has been spared the reciprocal tariff, the baseline and metals tariffs apply to our exports.
The impacts on Australia will be especially borne by the manufacturing industry. Australia exported $11.5 billion of manufactures to the US in 2024, which will now face tariffs between10% to 60% (depending on the amount of metals content in the product). The impact will be especially heavy for elaborately-transformed manufactures, where the US is our top trade partner taking 22.6% of exports.
But there are also risks for those who don’t export to the US. The imposition of US tariffs is likely to divert exports from all countries away from the US toward other markets. This will be especially pronounced for China and ASEAN, which have attracted some of the highest reciprocal tariffs given that these economies run large trade surpluses with the US.
Blocked from the US market, in the short term their exports will need to find a home elsewhere. And Australia may be that home. Australia imported $103 billion of manufactured products from China in 2024, and a further $45 billion from ASEAN. China is particularly dominant, accounting for a third of both our simple and elaborate manufactures.
This means the risk of US tariffs could extend to manufacturers who are not active in the US market. Both exporters to third countries, and those selling in the Australian market, will find themselves competing with displaced product. This is likely to put downward pressure on manufacturing selling prices in Australia and globally.
Despite the pressures and difficulties facing manufacturing, it has nonetheless delivered strong results in terms of gender uplifts. Indeed, manufacturing leads amongst Australia’s industrial sectors in terms of increasing the female share of the workforce.
Like most industrial sectors, full-time male employment remains dominant in manufacturing, accounting for around two-thirds of the workforce. But material increases have been delivered in increasing women’s participation. Over the last ten years, the female share of hours worked in manufacturing has risen by 4.7 percentage points to 26.5%. This is a better measure than female share of workforce headcount, as it adjusts for gendered patterns of full and part-time employment.
This scale of this uplift is brough into relief when compared to other traditionally male industrial sectors. Amongst this group, the female increase in manufacturing is second only to mining (up 6.3 percentage points), which was achieved on a much lower female base. The other industrial sectors – construction, wholesale trade and transport – have all delivered much lower increases in women in the workforce.
The manufacturing uplift is also notable given the fact that it has been the slowest growing of Australia’s industrial sectors over the last decade. Manufacturing has delivered steady increases in the female share of the workforce despite the fact it has not enjoyed the workforce growth of other industrials.
One of the factors which explains the uplift in women’s participation in manufacturing is automation. Automation leads to a qualitative change in industrial sectors, substituting higher skilled technical and professional labour for lower-skilled manual labour. As the former occupations face lower gender barriers to women’s participation, higher rates of automation unlock greater opportunities for closing workforce gender gaps. This accounts for why manufacturing and mining – two highly automation-intensive industries – have delivered the stronger gender uplifts than their industrial peers over the last decade.
Productivity is also emerging as a longer-term challenge. Improving productivity is critical for trade-exposed industries, as it allows us to stay competitive with foreign manufacturers that typically have lower labour costs and tax rates. Unfortunately, the data shows that Australia’s manufacturing productivity is falling behind global competitors.
The overall (or multifactor) productivity of Australian manufacturing has been flat for some time, and in 2023-24 was 1.0% lower than ten years ago. Labour productivity has declined by 3.7% over the same period with a major fall during the disruptions of the pandemic. This means the industry has shown no productivity improvements, and requires more labour to produce the same amount of output as it did a decade ago.
While Australia’s productivity performance has been quite weak for some time, manufacturing compares poorly to the national average. Overall productivity in the market sectors of the Australian economy rose 4.7% over the last decade, and labour productivity by 6.4%. It is one of only four industries – the others being construction, utilities and arts & recreation – that have seen productivity go backwards.
Falling productivity has many pernicious effects on manufacturing. It exacerbates skills shortages (as more labour is needed to produce the same amount of output). It lowers the ability of employers to pay real wage increases (as industry-level wage outcomes are closely tied to productivity). It reduces the financial resources available to invest in R&D and innovation. And it weakens our international competitiveness at the very time when trade disputes are putting our manufacturers under extra competitive pressure.
There is a clear and pressing need to get manufacturing productivity back on track. And the energy and workforce challenges afflicting the industry are a good place to start. Manufacturers will struggle to make the investments needed to raise productivity while their balance sheets are weakened by high energy prices, and they cannot recruit the technical specialists required for technology projects. With recession conditions already in play and the risks of the trade war looming, now is the time to urgently address these issues confronting our manufacturing sector.
Jeffrey Wilson is Head of Research and Economics at the Australian Industry Group.
He leads our economics team and provides strategic direction in developing the research program to support our advocacy, service delivery and policy activities.
Dr Wilson specialises in international economic policy, with a focus on how trade and investment shape the Australian business environment.
