Manufacturing decline not just a dollar story

The decline in the manufacturing sector is much more than a simple exchange rate story, the Governor of the Reserve Bank said today.

In a speech to the New Zealand Manufacturers and Exporters Association in Auckland, Graeme Wheeler said factors such as globalisation, outsourcing and international supply chains, along with competition of low cost producers and rising global demand for services meant that the relative importance of manufacturing had been declining in all but the poorest countries for the past 40 years. New Zealand was no exception.

Mr Wheeler acknowledged the New Zealand dollar was significantly overvalued in terms of economic fundamentals, and this was a headwind for some in the manufacturing sector. But he said there are no simple solutions available to the Reserve Bank.

“Some of the strength in our real exchange rate is due to global financial imbalances and the weakness of the US dollar in particular.”

Near-zero interest rates and quantitative easing by other central banks have pushed up currencies like the New Zealand dollar, and domestically, New Zealand’s poor savings record is also to blame.

Mr Wheeler said the Bank stands ready to intervene in the currency when circumstances are right and to use the Official Cash Rate as required. It is also investigating the use of macro-prudential tools which will help to support monetary policy.

While commentators have suggested a wide range of alternative policy responses to lower the New Zealand dollar, there are no quick fixes available to the Reserve Bank.

“Our economic challenges are different from the US, Euro area, and Japan, and quantitative easing would increase inflation, raise inflation expectations, stimulate asset prices, and lead eventually to higher interest rates.

“Efforts to improve the level and productivity of capital that labour works with, to reinforce ongoing fiscal adjustment, to re-examine the factors that diminish and distort the incentives to save and invest, and to reduce dependence on the savings of others, have to be a major part of the solution.”