Comments

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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Signs of challenges for exporters - NZMEA survey - Voxy, 6 Sep 2016 The latest New Zealand Manufacturers and Exporters Association (NZMEA) Survey of Business Conditions completed during August 2016, shows total sales in July 2016 decreased 15.27% (year on year export sales decreased by 20.48% with domestic sales decreasing by 6.03%) on July 2015.

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The Real Economy


The ‘Real Economy’ is made up of the farmers, manufacturers, tourist operators and service providers that sell to the world and generate New Zealand’s external income. As Angus Tait once said, “There are three ways to generate wealth; you farm things, you make things or you dig things up.” That is the essence of the real economy.

In the tradeable economy, firms compete with others anywhere in the world in any market to sell their goods and services. The domestic market in New Zealand, for most goods and services, is small. Firms here must compete locally and in export markets to have an expectation of earning sufficient returns on their often sizeable investments to make those investments worthwhile. Without sustained investment in innovation, research, product and process development, and more generally productivity improvements competitive advantage will lost as others improve what they offer to their customer.

This competition on a global scale brings many additional dimensions to the competitive framework. When a local firm competes with another local firm monetary and fiscal policy settings, regulatory requirements, finance costs, health and safety, compliance costs or even carbon costs are not competitive dimensions, they are the same for all competitors. Once competing in New Zealand against imports, or in offshore markets, these matters become a critical competitive concern.

These additional concerns show themselves as competitive disadvantage in terms of cost generating lower returns on the effort expended. In this way Government policy choices have a significant bearing on firms’ success.

So the non-traded economy might just shrug and say fine we only compete with locals so we don’t care what the policy framework might be as it is the same for everyone. That is correct to a point, but policies that hold up interest rates in the name of pressing back against inflation overvalue the exchange rate make imports and foreign holidays cheaper in the short term, but damage the ability of exporters to earn a living. That, ultimately, threatens the sustainability of the economy as a whole.

Unfortunately, in the short term the objectives of the tradeable and domestic economies are in conflict (high exchange rate and low cost imports vs low exchange rate and better returns from exporting), but in the medium and long term, the domestic economy can only be successful if the tradeable economy can function effectively. To compete globally good returns from exports are necessary to fund the product and process development necessary to remain competitive. Large investments in intellectual property and new machinery need higher returns to fund them.

Without investment and development the tradeable sector falters, jobs are lost or never come into being and demand in the domestic sector falls. Think of the whole economy as a table, the four legs represent the export sector (primary, processed primary, manufacturing and services) the domestic or non-traded (the tabletop) economy is supported by the export sector (legs). The domestic economy can only grow sustainably if the legs can provide adequate support.

Wealth transfers to the top of the table (domestic economy) from the legs (our exporters) via an overvalued exchange rate are a problem that threatens the economy as a whole. Our choice of policy settings for the past 20 years or so has consistently overvalued our currency; change is needed to rebalance our policy settings and arrest the decline of our export sector and more broadly, over time, the decline of our whole economy.