Manufacturing activity takes a dive

JAMES WEIR
Last updated 05:00 10/10/2012

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Manufacturing dropped sharply in the September quarter, according to a business survey.

Meanwhile, a leading economist says the sector has been in “crisis” since 1965.

And printing money or “quantitative easing”, as suggested by the Green Party this week, won't do much to help bring down the New Zealand dollar to help exporters, and could spark inflation.

The NZIER September quarterly survey of business opinion shows business remains gloomy about the general business climate, with a net 5 per cent of firms expecting things to get worse, compared with negative net 1 per cent in the June quarter, seasonally adjusted.

There was a slowdown in Canterbury and manufacturing activity took a dive in the latest quarter, according to the survey, but Auckland was improving.

Firms' trading activity was the weakest it has been for two years - with a net 7 per cent reporting trading was worse in the September quarter.

“It doesn't look like we are heading into recession, but it doesn't look like the recovery we saw in the first half of the year is going to continue,” NZIER principal economist Shamubeel Eaqub says.

The weak survey results suggested the Reserve Bank would keep official interest rates on hold for some time, till 2014, with a picture of patchy economic growth and subdued inflation.

“It doesn't look frightening enough yet to cut rates,” Eaqub said. “It is not panic stations yet."

With cash rates at 2.5 per cent the central bank should cut the rate only “when they have to”. If the Reserve Bank used up that firepower too soon, it might have to consider “quantitative easing” as the Green Party suggested.

The Greens said at the weekend that New Zealand's high exchange rate was hurting the manufacturing sector and “quantitative easing” would help improve competitiveness and boost jobs.

“Manufacturing has been in crisis since 1965,” Eaqub said. “It is one of the side-effects of rising incomes - you don't have access to cheap labour.”

NZIER's latest survey showed a net 26 per cent of manufacturers said output was down in the September quarter, much worse than the net negative 3 per cent in the June quarter.

Exports remained in positive territory, but were slowing. Domestic sales had slowed and weakness in new orders suggested sluggishness in manufacturing would continue.

The weaker survey may also reflect a slowdown in Australia which is a key market for New Zealand's manufactured exports.

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The same discussion about declining manufacturing had gone on for decades in the United States and Europe, Eaqub said.

“People glorify manufacturing as something special and different from other parts of the economy but that's not necessarily the case.”

Meanwhile, the US and Europe had tried quantitative easing, printing money, because they had exhausted other options. New Zealand was not in the same boat, with room to cut official interest rates and boost government spending.

Longer term, "quantitative easing" drove up inflation, which affected lower and middle income earners more than the wealthy.

- © Fairfax NZ News

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