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MAR 14

Looking back on 2013

The past year has been good and bad in parts, how much of each rather depends on the characteristics of any particular business. Early on in the year, much of our focus was on the Parliamentary Inquiry into Manufacturing, run by the opposition parties. This was sparked by difficulties in the sector and a string of closures and job losses throughout 2012. Political comment on this Inquiry centred around “crisis what crisis” from the Government. We remain of the view, further supported by the 2013 Census, that manufacturing is in crisis as onshore investment continues to decline. The report from the Inquiry has a number of recommendations that have strong base in the submissions made and therefore strong support from the manufacturing sector. We hope to see them as policy one day.

From the 2013 Census, less than one in ten people are employed in manufacturing, (their activity represents over 13% of GDP, and 24% of exports) so it is easy for everyone else to take manufacturing for granted or even see it is some optional unimportant part of our economy. Nothing can be further from the truth; the service sector, high wages and innovation all depend on the foundations provided by the manufacturing sector. We can learn a lot from other economies; those that continue to see manufacturing as key economic activity have done significantly better than those who have bought into the post industrial fantasy.

The Reserve Bank of New Zealand (RBNZ) is finally moving beyond interest rates to support financial stability by targeting asset price inflation directly through the quantity of debt (LVR) as opposed to indirectly via the price of debt (OCR). Higher interest rates when the rest of the world are cutting rates or printing money are poison to our external sector. The need for macro-prudential options that directly target the quantity of debt are clear. We would like to see the current tools extended around “debt servicing to income” limits that have been successfully used elsewhere. Macro prudential intervention offers the prospect of directly controlling asset inflation without the exchange rate impact associated with the indirect influence of interest rates.

This change and the use of prudential intervention around the quantity of debt is part of a wider generally changing view of how central banks should protect financial stability, control inflation and control other important targets, such as the exchange rate and employment. We see this use as essential in a modern economy; as many other countries have also learned this since the Global Financial Crisis (GFC). Our simple single target, single lever mechanism, that claims to control inflation, has done so by forcing deflation into the traded sector via the exchange rate mechanism; overvalued exchange rates hurt exporters, reduce onshore investment, employment and wages.

So far, it is unclear as to the extent of LVRs actual effectiveness or ineffectiveness in bringing down house price inflation, but there is no doubt that the resulting reduction of high LVR loans on banks balance sheets will have some effect in building resilience against any shock.

Looking forward to 2014, there are two main events we so far know of that will affect the sector; the election, and likely OCR increases by the RBNZ. The election will set the tone for policy direction over the next three years, with each party’s commitment to improving and supporting the manufacturing and exporting sectors our key focus. So far we have heard some intentions from opposition parties to introduce policy change which could be very beneficial to the sector; we need to hear more from the current Government.

The suggested OCR increases in 2014 will also be significant, if New Zealand is one of the first developed countries to do so since the GFC we can expect a general and significant currency appreciation. Furthermore should the Reserve Bank of Australia, who have been commenting around further easing of their reference rate, continue to loosen monetary policy we can expect to see even more pressure on the Australian cross rate, which has been hitting five year highs recently. All up this is a potentially a serious problem for exporters into Australia. 

tags: exports, manufacturing, manufacturing inquiry, census, macroprudential, central banks, rbnz
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