Exporters’ high exchange rate hurdle

It’s hard to tell how New Zealand has been faring, but world manufacturing output has grown by 6.5% in the first quarter of 2011 compared to the same period last year, according to the United Nations Industrial Development Organisation (UNIDO).

“The figure clearly indicates the progress of the recovery of world industrial production from the recent financial crisis,” UNIDO said in the first edition of its new plan to report industrial statistics quarterly. Formerly the presentations were annual.

Official manufacturing production statistics in this country are not so up to date. The latest set, published on April 1, was the Economic Survey of Manufacturing: December 2010 quarter. Those stats tell us sales volumes (seasonally adjusted) for the December quarter rose 3.3% from the September 2010 quarter while values were up 3.1%. But that performance was heavily farm-reliant. Excluding meat and dairy product manufacturing, sales volume rose just 0.5% and values 0.8%.

Trend data showed the volume of manufacturing sales had generally been in decline since the December 2007 quarter, down 10%, although the statisticians said trend estimates may be revised and should be used with caution until more data points are available.

The strength of the exchange rate – the kiwi dollar hit record post-float highs against the US dollar this week – is an obvious impediment for non-commodity exporters. John Walley, chief executive of the Christchurch-based NZ Manufacturers and Exporters Association, is telling the Government any credible export-based economic plan must deal with persistently overvalued and volatile currency.

“For exporters outside of commodities, those adding value to commodity exports and those making differentiated products, these currency levels are completely unsustainable,” he said. “Inaction will cost growth and jobs.”

Other business leaders disagree and are urging the Reserve Bank not to intervene in the currency markets despite the dollar’s surge. Business New Zealand chief executive Phil O’Reilly is aware the dollar’s strength will hurt exporters if it continues, but he says intervention would be damaging for the country as whole.

“The cost of intervention would be massive. We’re small country, our Treasury will be paying out lot of dough to try to stabilise it and it will do lot of damage to our economic reputation.”

That’s no comfort for manufacturers. The latest NZMEA Survey of Business Conditions, completed last month and due to be published today, is expected to show drop in total April sales. Walley then will have platform for reiterating his concern that the viability of some high-end exporters is being threatened.

He points out that this is not just US dollar story; our dollar has reached three-year high against the Trade Weighted Index, although the cross rate with Australia brings some good news.

Manufacturers exporting for Australian consumption are doing well, he agrees. However, for those selling pass-through intermediate products, volumes are falling because the high Australian cross rate with the US is damaging Australian manufacturers.


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