David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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Reserve Bank of New Zealand

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Over the last month we have been fortunate to have two representatives from the Reserve Bank of New Zealand (RBNZ) speak to members at our Leaders’ Network events. First, Geoff Bascand, Deputy Governor and Head of Operations spoke to members in Christchurch and this week Dr John McDermott, Assistant Governor and Head of Economics presented to Auckland members. It was great to meet many of you at these events and to hear an open discussion between members and these RBNZ officials, shedding some light on their thinking and view of the economy.

First I want to talk a bit about what we were told about the RBNZ’s mandate and responsibilities, and secondly outline some of their recent public comments and views of the economy that are relevant to conditions for manufacturers and exporters.

The RBNZ has two main jobs which affect our economy: the first is managing inflation through monetary policy to a target set by government, and the second is promoting the financial stability of our economy and banking system. Inflation targeting and monetary policy has a much more direct and visible impact on manufacturing and exporting businesses, while financial stability is a more hidden, but equally important role.

Inflation is targeted through setting the Official Cash Rate (OCR) – the benchmark interest rate which sets the cost for banks to borrow from the RBNZ. The OCR is the primary channel by which the RBNZ affects conditions for manufacturers and exporters, and this manifests in a couple different ways. Firstly, through its impact on borrowing and debt servicing costs, as the OCR influences interest rates that banks offer to businesses.

Secondly, through the exchange rate – relative differences in interest rates between countries affects the demand for our currency. If our OCR is higher than those in other countries, there is an incentive to buy New Zealand dollars to take advantage of the higher return from our interest rates.

Their second job, overseeing financial stability is about assessing and controlling risks in the finance and banking systems. This part of the RBNZ’s mandate has driven much of their policy changes of late, including the Loan-to-Value Ratio (LVR) introduced in 2013, and the more recent LVR changes for residential property investors in Auckland. The aim of both changes was to reduce the amount of risky lending happening, limiting default risk and helping to reduce the potential damage to the banking system in the face of a shock or fall in house prices.

Protecting financial stability is vital to manufacturers and exporters, as the whole economy is hugely affected by financial crisis and the following recessions, as seen through the Global Financial Crisis and other housing bubble crashes around the world.

In their most recent OCR decision, the RBNZ took action to reduce the OCR, from 3.5% to 3.25%, in response to low inflation, an overvalued exchange rate and low commodity prices – this was a move the NZMEA support, particularly for bringing our interest rate closer in line with the rest of the world which improves manufacturers’ and exporters’ relative competitiveness. There is an expectation that a further cut by 0.25% is not far away if current conditions persist – something we are looking forward to.

Generally the RBNZ see our economy as going well, but with some risks, currently growing by about 3% annually. The main factors supporting growth currently are high net migration, low interest rates, construction activity in both Auckland and Christchurch and the recent decline in fuel prices. They characterise global growth as moderate, with volatility in financial markets having increased. Inflation and wage inflation has been low, with future expectations for both subdued.

Our exchange rate has been declining, but the RBNZ still see it as overvalued. In this context John McDermott reminded us of a simple, inconvenient truth – that since 1973 New Zealand’s savings have been lower than our internal investment requirements, resulting in comparatively high debt levels, with household debt at 95% of GDP, and government debt at 26% of GDP. As a country, we are seen as a risky borrower because of our comparatively high debt levels, and we pay the price in the form of higher interest rates.

The main risks outlined by the RBNZ are the overvaluation of house prices, particularly in Auckland, which represent a risk to financial stability, and the large falls in dairy prices, which is expected to lower farm incomes by $7 Billion in the 2014/15 season – this fall is about 3% of nominal GDP. The RBNZ cannot affect global dairy prices, but the cut in the OCR and subsequent fall in the currency will help dairy returns somewhat.

John McDermott pointed out that the RBNZ has no mandate in housing as such, but they do have a large role in protecting financial stability in response to high house price inflation. As discussed above, they have made moves in this area with new LVR restrictions, and they are also looking into other measures which may be needed if the situation worsens.  

tags: rbnz, reserve bank, exchange rate, inlfation, ocr


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