Fears high kiwi may delay manufacturing's recovery

Manufacturers say business confidence should improve, helped by exports across the Tasman, as the country emerges from the worst recession in recent memory.

Economists say the recovery of the manufacturing sector will be patchy as the wider economy recovers at a slow pace.

Some are worried the tourism sector could also see some further downside.

Manufacturers continue to be worried by the high rate of the kiwi versus the US dollar, particularly as many commodities including dairy, lamb and wool are priced on that cross-rate.

Helping conditions for exporters is the kiwi/aussie cross-rate – which at A78.35c is well below the long-term average of around A85c and last year's peak of A94c.

However, the rate of the kiwi versus the greenback was yesterday around US71.71c, well above manufacturers' preferred level of US65c or lower.

ANZ Bank chief economist Cameron Bagrie said the economy was "turning the corner slowly", though not every sector was recovering at the same speed. Any optimism was cautious optimism.

"It's been pretty tough for 18 months, so when you see an uptick over two to three months – yes it's welcome, but it's an awful long way to go. And I think that applies for a lot of industries at the moment."

A durable, sustainable recovery needed to be led by the earnings sector, rather than the household sector, Mr Bagrie said.

The New Zealand Manufacturers and Exporters' Association survey of business conditions completed last month shows total sales in October fell 13 per cent from the same month a year earlier.

Export sales decreased 20 per cent compared with October 2008, with domestic sales falling 7 per cent on the same month a year earlier.

"The mood has remained fragile among manufacturers and exporters in October.

"Confidence and sales have remained low," NZMEA chief executive John Walley said.

"The composite index numbers suggest improvement may not be too far away."

UBS New Zealand senior economist Robin Clements said it was too early to say that some sectors such as manufacturing or even tourism were on the road to recovery.

"I think it will be patchy. It's quite a mixed bag if you look across the exchange rates.

"We're high against the pound and US dollar – well above average exchange rates. Whereas against the rest we're below average, so competitive.

"There are going to be some firms, sectors that are actually doing well by the currency, and others that aren't."

- © Fairfax NZ News