The past year has generally been more positive for manufacturers and exporters than we have seen for a while.
John Walley, Chief Executive, New Zealand Manufacturers and Exporters Association The past year has generally been more positive for manufacturers and exporters than we have seen for a while. A significantly overvalued currency continues to be an issue for margins and competition pressure, but some recovery in export markets and improving domestic conditions, for some, have provided a lift in activity.
Our own survey has shown a trend of improving year on year export sales, with falling domestic sales throughout 2014, coupled with consistent expectations of improving future conditions.
2014 has been a very mixed year for international markets, with new opportunities, ongoing uncertainties and new risks emerging. Europe has struggled with stagnating growth and facing a very real risk of deflation, exporters to this area have experienced soft and falling demand coupled with intense competition as producers elsewhere search for sales.
This risk of deflation and continued stagnation prompted the European Central Bank to add further stimulus, and they are considering starting a U.S style bond purchasing (quantitive easing) programme.
Trade between New Zealand and China continues to grow. However we have seen the start of a potential slow down in China’s growth, which could see lower growth rates in the future – this is a greater risk going forward as we become more reliant on trade with China.
The U.S market has improved during 2014, and the Federal Reserve finished their tapering, marking an end of their massive bond purchasing programme for now. The recovery of the U.S economy and their monetary policy decisions will have an impact on the level of our currency in the coming years, as will our own domestic policy decisions.
In March of 2014 we saw the first increase in the OCR by the Reserve Bank of New Zealand (RBNZ), making us one of the first advanced economies to start raising interest rates. The RBNZ enacted four such increases in 2014, moving the OCR from 2.5% to 3.5%, and then stopping for a period of assessment. In hindsight, it appears that the final 25 basis point increase may have been premature, particularly with recent inflation reporting lower than expected.
The RBNZ also ramped up their efforts to talk down our currency, repeatedly expressing concern over its high value, even describing it as “unjustified and unsustainable”. RBNZ Governor Graeme Wheeler has expressed similar sentiment at nearly every OCR decision since he was appointed in late 2012; although his wording became increasingly strong as our currency failed to significantly respond to the large falls in dairy prices, which fell around 50% since November 2013.
This led to the RBNZ intervening in the currency market during August to bring down the currency. This intervention, paired with the end of the Federal Reserve bond buying programme, as well as slightly more negative New Zealand economic data has seen the dollar fall back from its 2014 highs back to the “taper tantrum” levels seen in mid 2013.
Even so our currency remains overvalued and still has a long way to move to reach a sustainable fair value that pushes the right investment signals into our economy, as well as giving exporters a reasonable return on investment.
In the past year investment in the dairy sector has been a significant source of growth for manufacturers supplying and connected to the industry. However the low dairy prices could be a significant drag on our economy if they continue into next season.
Bill English has recently warned that this, along with low inflation, is putting the planned Government surplus in question. The buffer provided by record high payouts last season will help farmers, although it has been indicated the 2014/2015 farm gate price may fall below the cost of production for many.
Looking forward to next year, manufacturers and exporters will continue to innovate and succeed in tough times. There are still risks, particularly around the currency, the effect of low dairy prices on our economy, and the health of our export markets, but many manufacturers are reporting positive expectations, seeing opportunities for growth.
Finding skilled staff remains an issue for many; however manufacturers continue their own on and off the job training and apprenticeship programmes in order to up-skill and retain their staff.