Australia's manufacturers are facing the most challenging times in 50 years due to supply headwinds and escalating costs but are benefiting from strengthening demand, a new survey has found.
The latest Australian Chamber of Commerce and Industry-Westpac industrial trends survey showed business conditions are expanding and gained momentum in the June quarter.
"(But) the economy is bumping up against capacity constraints in a tight labour market," Westpac senior economist Andrew Hanlan told reporters in Canberra on Tuesday.
"The economy needs to lift investment to be able to boost capacity and provide a lift to productivity to drive a sustained recovery.""
The survey's actual composite index - a gauge of business conditions - rose to 64.5 in the June quarter, up from 56.7 three months earlier and around 51 over the second half of 2021 during COVID-19 Delta lockdowns.
A result above 50 indicates industry is expanding.
Its expected composite was 67.5, indicating respondents are anticipating that new orders and output will advance at a healthy clip in the September quarter.
But there was a clear message in the survey that "consumers should brace for further sharp price increases".
ACCI chief executive Andrew McKellar said one of the key emerging challenges for the Australian economy is the spectre of rising costs, increasing pressure on prices and inflation.
"Unit costs for manufacturers are escalating quite sharply now. They are able to pass some of that back through increased selling prices but not all of it," Mr McKellar told reporters.
He said there are also the first signs of upward pressure on wages, while the difficulty in sourcing labour has increased in the past three months.
"This is at its most challenging level in nearly 50 years," he said.
He said with inflation predicted to hit seven per cent by year's end, and a global economic slowdown threatening to mar Australia's economic recovery, it is imperative that energy, labour and material impediments are overcome to ensure the industry's sustained recovery.