Importantly, the price of oil has collapsed by 30 per cent with more to follow.
-Kim Campbell, chief executive of the Employers and Manufacturers Association kim.campbell@ema.co.nz

Last century we used to say anything good for the Australian economy was good for New Zealand. When their economy went well they bought more of what we had to sell, and Australia remains today the major market for our manufactured goods and services.

But the past two years have not been kind to Australia, at least not to their manufacturers. Hard on the heels of a ‘Dutch disease’ epidemic whereby the Australian dollar explored new heights on the back of high mineral prices – hard going for the competitiveness of their manufacturing exporters – came the announcement of vehicle plant closures.

Reflecting this, Australia’s Performance of Manufacturing Index (PMI) has registered a steadily shrinking industrial base every month since August 2012.

On this side of the Tasman over the same two years New Zealand’s PMI has in contrast recorded a steady, robust expansion, as high as 63 in November 2013 and 60.6 in October this year.

Its been a remarkable run. Even more so because over the same period we have seen a large number of businesses laying off staff. Yet the unemployment rate has kept falling.

This year the job losses have included 200 from Summit Wool Spinners, 120 at Fitzroy Yachts, 100 at Contact Energy, 84 at SafeAir, 120 to go at Holcim Cement, 100 at Croxley, 20 at ITL in Taranaki, 40 at Wellpack in Upper Hutt, 120 at Alloy Yachts, and several hundreds from various sawmills.

Many of these well publicised losses were blamed on the high exchange rate, though there have been other contributing factors. But despite the jobs lost the official unemployment rate went from 6.4 per cent a year ago to 5.4 per cent and that also in spite the fastest population growth New Zealand has had in a decade.

Average hourly pay across the economy went up 2.3 per cent during the year too while those employed in manufacturing over the past two years to September increased by 7000 to 247,000, according to the Household Labour Force Survey.

At the start of the year the success of our economy was being determined by the success of our dairy, meat, logs and other commodities. In effect they were setting the level of the NZ dollar. Our terms of trade were at heights not seen for a generation, amplified by a torrent of money printing in the US, Japan and Europe which depressed the value of those currencies.

A NZ Treasury paper in 2005 noted this was hardly new, saying “..the exchange rate has tended to move in the same direction as overall commodity prices, smoothing the impact on the New Zealand dollar prices that our exporters receive.”

In the face of such a major challenge, manufactured exports held their ground.

Of the total exports of all manufactured goods valued at $42,038 million (including dairy, processed meat, seafood, and wood pulp) for the 12 months ended September 2014, manufactured commodities and elaborately transformed goods accounted for over a third, $15,738 million.

Two major areas dominate in this non-commodity area: food and beverages exports which, excluding dairy, meat and seafood, were worth $4,154.5 million, and industrial plant and equipment exports ($2,603.8 million).

The bare numbers show only painstaking advances, and not making much of a contribution to the government’s target for exports to achieve 40 per cent of GDP by 2025. In exchange rate adjusted terms they represent steady progress and a remarkable result.

But with a more encouraging currency and more competitive interest rates how much more headway could have been made?

Which leads to the question: What if the OCR this year had not been raised and the exchange rate thereby underpinned?

Early this year EMA said any increase in the Official Cash Rate would be precipitate, unjustified and speculative. It proved to be so.

Inflation in New Zealand has all year remained stubbornly below the mid-point of the Bank’s mandated inflation target. But interest rates were raised, the carry trade encouraged, and our cross rates with the US and Australia remaining higher than otherwise, and shredded margins on our $10 billion export trade across the Tasman.

Most economic commentators early in the year reasoned the present recovery would be similar to others, meaning it would be accompanied by rising demand and increasing inflationary pressures. This time it has been different. Other big factors are in play and they are new.

China rapidly becoming our major trading partner represents one of them. (The Australia/ China FTA could not have come at a better time for Australia, with benefits for us as it helps lift their economy).
Importantly, the price of oil has collapsed by 30 per cent with more to follow. The second round effect of this will cut more cost out of production and freight internationally. Deflation will become a more real threat than inflation, if not already, as is evident in Europe and Japan. China’s growth targets also continued to decline.

During the year a report NZ Manufacturing Sector: Its Dynamics and Competitiveness was published covering 15 high growth manufacturing companies. In passing it recorded that manufacturing accounts for 14.6 per cent of GDP, and is rich in skills, and highly paid employment and R&D activity.

The companies profiled in the publication are all highly successful, a success they attribute to an intense focus on innovation, a willingness to re-invent themselves, invest heavily in R&D, and in skills and market development.

Leading businesses such as these – including F&P Healthcare, Orion Health and Gallagher – demonstrate what it takes to become a successful manufacturer in New Zealand. They are showing how others too can break free of the forces beyond their control, including the currency.

In doing so they are blazing the trail for New Zealand as a whole, which is that to be successful New Zealand must become a world champion at innovation and the best place anywhere to undertake R&D.