Many factors in manufacuring malaise


Reserve Bank Governor Graeme Wheeler says the decline in manufacturing is much more than an exchange rate story.

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. . .

There’s little we can do about globalisation, outsourcing and international supply chains, competition from low cost producers and rising global demand for services.

But improving our savings record is entirely in our own hands.

That probably won’t have much impact on manufacturing because it won’t counter all the other factors which are making it difficult, but it would be much better for us as individuals and for the economy.

NZ can learn from Japan and Switzerland


Finance Minister Bill English gives more reasons why meddling with the exchange rate isn’t a good idea:

A Reserve Bank paper published earlier this year looks at interventions by the Bank of Japan and the Swiss National Bank and their relevance to New Zealand. It notes that economic conditions are quite different in New Zealand from Japan and Switzerland. Both of them have experienced deflation recently, partly due to their strong currency appreciation. New Zealand has not. New Zealand has in fact experienced an increase in its terms of trade, contributing to upwards pressure on the exchange rate. Switzerland and Japan have been forced to attempt to lower their currencies in order to ease monetary conditions. In New Zealand we could just lower interest rates if we want to ease monetary conditions.

John Hayes: What specific lessons can New Zealand draw from the results of currency market interventions by Switzerland and Japan?

Hon BILL ENGLISH: The Reserve Bank paper confirms that the currency market interventions are expensive and they do not have a lasting impact. They note that currency interventions since 2008 have largely resulted in financial losses for the Swiss National Bank and the Bank of Japan, and they have been ineffective in lowering their currencies. Since the beginning of 2008, despite the efforts of the Swiss bank to keep their currency down, it has actually appreciated 27 percent against the euro and 15 percent against the US dollar. In Japan the yen has appreciated 29 percent against the US dollar and 37 percent against the euro.

New Zealand’s economy is much smaller than Japan’s and Switzerland’s.

They might be able to afford the losses which came from meddling but we can’t and if it didn’t work for them it certainly won’t work for us.

Plain English on exchange rate


Labour’s David Parker thinks the government should meddle with the exchange rate:

Finance Minister Bill English has a much better strategy:

We are focused strongly on the competitiveness of our businesses. It is difficult, if not impossible, to manage our exchange rate to a significantly lower level, so we are focusing on helping our exporters to be profitable, regardless of what the exchange rate is.

Parker had another go later in Question Time:

4. Hon DAVID PARKER (Labour) to the Minister of Finance: How many export and import substitution jobs does he estimate have been destroyed in 2012 as a result of the exchange rate, which has been at 70 or above on the Trade Weighted Index for every month of this year?

Hon BILL ENGLISH (Minister of Finance): There is no officially accepted measure for what the member is asking for. What I can tell him is that total goods and services export receipts have increased 15 percent, from $52.9 billion in the year to March 2010 to $60.9 billion in the year to March 2012, and a net 57,000 more people have jobs than 2 years ago. The economy is dynamic, and jobs are constantly shifting as innovation, investment, and demand change. I would be suspicious of any measure that attempted to pick out one factor, when there are many factors in a company making a decision to export or to hire another worker.

Hon David Parker: Does he agree with the Prime Minister’s statement of January 2012: “We are concerned at the level of the exchange rate because we think that above $0.75 [U.S.]it’s very difficult for our export sector.”?

Hon BILL ENGLISH: Yes, I do agree with that. The export sector has shown itself to be very resilient and capable of increasing exports and production when it is backed by stronger policies on competitiveness. If the member is suggesting that there is some way to choose an exchange rate, then I would be keen to hear from him on that, but of course he needs to keep in mind that even if he could choose the exchange rate, reducing it would reduce the standard of living of all New Zealand households.

Hon David Parker: Does he agree with the Prime Minister’s statement of August 2012 that continued currency appreciation would make the economy at some point “splutter and stutter and probably stop”?

Hon BILL ENGLISH: It is possible that that could happen. As it has turned out in New Zealand, although we have had a high exchange rate now for a number of years, a relatively high exchange rate, our export sector has continued to expand. I think the member is getting at the issue of whether we can choose an exchange rate. It would be nice if we could, but there is no known method for picking the right exchange rate in the first place, and, secondly, there simply are not the tools to hold the exchange rate at whatever desirable level there is.

Hon David Parker: If China is running a programme of competitive devaluation of its currency, as are the US, the UK, and the EU, if Switzerland is defending a cap on its currency, which is the opposite of what the Minister just said could be achieved, if Singapore is managing within a range, if Brazil and Chile are intervening in capital flows, and if Japan is printing money too to protect its exporters, why should New Zealand exporters be slain and New Zealanders lose their jobs because his Government refuses to move on the primacy given to inflation targeting? [Interruption]

Mr SPEAKER: Order! It is a serious question.

Hon BILL ENGLISH: The member’s analysis is simply wrong. We could go through all those countries, but the countries that are actually defending a fixed rate, Singapore and Switzerland, both have very large reserves, and, in the case of Switzerland, they are building up huge imbalances in defending that rate, and one has yet to see whether the experiment is going to work. In the case of the UK and the US, they are printing money because they have zero interest rates. The fact that they are printing money is a sign of deep distress in their economies, not success. I would not like to be in that position. It would be bad for New Zealanders, bad for their incomes, and bad for their job prospects.

Rt Hon Winston Peters: Given his professed concern and that of his Prime Minister about real employment and real growth, has he asked Treasury and the Reserve Bank to calculate the damage, as the primary question asked, in terms of jobs and exports from an overvalued exchange rate; if he has not, why is he giving answers that say that nothing can be done about it or nothing can be quantified?

Hon BILL ENGLISH: Well, the calculations on damage would depend entirely on your assumption about what the alternative was. Would the alternative be, you know, the Zimbabwe exchange rate, or the Japanese exchange rate, or the Aussie dollar exchange rate? I mean, it is a meaningless calculation. I mean, members of the Opposition are—

Rt Hon Winston Peters: I raise a point of order, Mr Speaker. The question asked him as to why he has not asked the Reserve Bank or Treasury to do these calculations. I am not interested in his ideological views; I am interested—

Mr SPEAKER: No, no. Order! I have heard the member’s point of order. He is now going on to debate it. The Minister is answering the member’s question absolutely explicitly. The member asked why he has not asked Treasury to carry out these calculations. The Minister is explaining why he has not—that he believes such calculations are meaningless because of the difficulty in establishing the base level for the dollar to commence the calculation. That is his answer as to why he has not asked Treasury to do that. [Interruption] Order! He has answered the question. Does the member wish to ask a further supplementary question?

Rt Hon Winston Peters: Well, whilst most other Ministers of Finance in the developed world, in countries doing far better than New Zealand, are implementing policies to manage their exchange rates—policies endorsed by the IMF and leading international economists—why do he and his colleagues keep on saying again in the House today, as they have for months, that they can do nothing?

Hon BILL ENGLISH: We have not said we can do nothing. What we have said is that we can use the tool that is likely to be effective and sustainable for New Zealand, and that is to improve the competitiveness of our exporters. There is no free lunch around the exchange rate. Any attempt to move it comes with large costs and large risks. New Zealand has been down that path before. It found that it was not sustainable, and for the last 25 years it has maintained a policy of a floating exchange rate, with the capacity to intervene in extreme circumstances. We do not intend to change that policy, because we have not yet seen from the members a viable alternative way of managing an exchange rate.

Hon David Parker: Does he agree that the—[Interruption]

Mr SPEAKER: Order! I want to hear the Hon David Parker.

Hon David Parker: Does he agree that the current policy settings, which give primacy to inflation targeting over the exchange rate, are not working, and is he ready to conclude, after a four decade- long current account deficit, that inflation is not the pressing problem for growing jobs in the economy—it is the exchange rate?

Hon BILL ENGLISH: No, I am not going to agree with that. The challenge here would be that even if you could change the Reserve Bank of New Zealand Act to tell the Reserve Bank to target the exchange rate, no one knows how it could do that in a sustainable manner that would significantly shift the exchange rate track. Oh, it is all in the book the member is waving about; it is all in the little red book. The fact is if the member looks at those countries which say they are doing it, such as Chile, Brazil, and Japan, it is highly arguable whether they are making any headway at all, given the large risks they are taking.

That’s the plain English answer and it’s also good economics.

New Zealand used to have a managed exchange rate and the people it benefitted most were currency traders who gambled on it.

Those calling for the government to meddle are showing their economic ignorance.

Businesses should treat the value of the dollar like the weather. Sensible ones take account of it but put their energy into factors they can control.

High $ hits import substitutes more


The high value of the New Zealand dollar against the United States dollar does erode returns for exporters who trade in that currency.

But it’s manufacturers competing with imports who are finding it most difficult:

In its review of current economic conditions the Reserve Bank last week noted exports of manufactured goods have not fallen over the last three years, and are worth at present close to $4.5bn a year. But while manufactured volumes have held up, the high NZ dollar is encouraging continued substitution with imports, as it lowers the price of imports relative to domestically produced goods and services. The RBNZ says while prolonged weakness in the NZ construction sector has contributed significantly to the divergence “it appears the high NZ dollar is negatively affecting import-competing firms to a greater extent than exporters.”

This highlights the benefit of our open borders for domestic consumers.

In the not-so-good-old days tariffs and import restrictions kept goods produced overseas out of New Zealand.

Producing things we couldn’t import did protect jobs here but that protection came at a very high price.

We had less choice about what we bought and domestically produced goods were often of lower quality and/or higher price.

The job losses and business closures which followed the opening of our borders got headlines.

The stories of existing businesses which adapted and new ones which set up and prospered by producing things people here and in the rest of the world wanted to buy often went unnoticed.

The trading environment, here and overseas, isn’t easy. But meddling with the exchange rate, subsidising local firms or closing our borders to imports would be band-aid solutions which would take us back to the bad-old-days.

Economic Development Minister Steven Joyce described calls for meddling a snake oil salesman solution:

He says the Reserve Bank’s fundamental objective has to be inflation and keeping the NZ economy on track over time. “You cannot say to the Reserve Bank we want you to favour one particular industry against a whole bunch of other things that are going on. That is not the answer. The answer is to make NZ businesses more competitive. That’s what our business agenda’s about. It’s investing in skills. It’s investing in innovation. It’s investing in the RMA to get things happening. It’s investing in growing export markets.”

Anyone who remembers the 80s knows that such snake oil solutions eventually poison the economy which has then to be treated with strong and very unpalatable medicine.

Alternatives to meddling with exchange rate


Meddling with the exchange rate isn’t a panacea for the world’s woes, Employers’ and Manufacturers’ Association chief executive Kim Campbell says.

He says many of the factors influencing the dollar’s values are largely out of our control.

“The things that are in our control include re-examining how central and local government can avoid adding to inflationary pressures,” says Mr Campbell.
Examples are:
* Freeing up the supply of land at local government level to make building a house more affordable.

* Ensuring tax policy takes account of its impact on monetary policy. For example, any new government spending should be assessed for its impact, both short-term and longer term, on inflation.

* Introducing a Regulatory Responsibility Act to improve the quality of regulation.
* Reducing government and private sector debt where appropriate (high debt drives up interest rates as lenders demand a risk premium) – we need to stay the course.

These are far more likely to help and less likely to have nasty consequences than meddling with the exchange rate.


Parker and Peters singing same silly song


New Zealand First leader Winston Peters used Question Time yesterday to take patsy questions about his Reserve Bank Amendment Bill from one of his MPs.

He then filibustered to keep the Bill alive.

He’s singing the same silly song as Labour’s David Parker who also thinks the Reserve Bank has failed.

. . . The RBNZ had failed to stop the credit boom of the mid-2000s, despite raising benchmark interest rates to a high point of 8.25 percent before the global financial crisis in 2008. . . .

Is this the same David Parker who was not only an MP but a Minister in the government in the mid-2000s?

That’s the government which contributed to high interest rates with high public spending and policies which fostered debt-fuelled consumption.

Both Peters and Parker want a lower exchange rate.

Both are wrong in thinking mucking about with the bank’s role in targeting inflation will achieve that without creating a whole lot of other problems.

The Visible Hand in Economics explains a persistently high real exchange rate isn’t the fault of monetary policy and the RBNZ:

 A persistently high real exchange rate tells us something structural is going on in our economy – it could be a sign of a government sector that is “too large”, poor domestic competition, a excessively low savings rate relative to investment opportunities in a country, or some mix of similar issues.  As a result, this has to do with competition policy, tax policy, government transfers, and the allocation of government services – but nothing to do with the Reserve Bank keeping price growth at 2%pa.  Remember, it isn’t just an issue of too much credit being offered but too much being borrowed by people domestically who wish to investment and consume.

Remember the exchange rate is a price – it is a “signal” of real imbalances rather than the cause.  Remember, it hasn’t been the “consumption” of cars, TV’s, and baseballs that has been excessiveit has been our “investment” in housing stock prior to the crisis.  Remember that working for families was a large transfer to the middle classes – which helped to smooth income inequality, but also would have pushed up house prices and could have lifted the real exchange rate by increasing demand for non-tradables … in fact the more effective the programme has been, the larger this impact would have been.

The high $NZ – $US exchange rate does erode returns for exports but neither Peters nor Parker have the right prescription for helping that.

Snake oil salesman can’t sell two exchange rates


People calling on the government to do something about the exchange rate only look at only the benefits, without acknowledging the costs.

But as Economic Minister Steven Joyce explains we can’t have one exchange rate for what we sell and another for what we buy:

  A lot of exporters – I mean every exporter let’s face it, likes a lower dollar.  What they would love really is to have a lower dollar which they’d sell stuff, cos they’d sell their stuff for more, and they’d like a higher dollar for the stuff they buy.  They’d like two exchange rates.  And I understand that, cos I’ve been involved in an export industry myself, and you’d always love two exchange rates.  Unfortunately the world only gives you one, that’s right.  So their input costs are significantly lower.  So if you take oil and gas and a lot of those things that come in on world prices, the input costs are lower.  And yes it’s more challenging with some of the export costs or the sales costs, sales revenues that you get, but it is a mixed story. A lot of manufacturers are doing very well, some struggling, particularly the more commodity based ones. . . .

There is no question exporters would get better returns if the dollar was lower but everyone would also face higher costs for everything we import. That’s not just luxuries like electronic toys, it’s necessities including fuel, machinery, medicines and medical equipment and a lot of food.

. . .  Well fundamentally the real opportunity at the moment, and everybody knows this, is that it’s the Australian dollar, and we’re currently at quite low levels against the Australian dollar, about 78 cents, and you can’t have things changed, different exchange rates for different countries as we know.  If we went down further against the Australian currency, which is what for example Mr Wally recommends.  He suggests that there should be a 20% devaluation in the New Zealand dollar, 25% I think he’s looking for, but that would put us at 58 cents Australian which is just ridiculous.  And also it would put us against about 60 cents US, which people would say well that’d be nice.  But then of course you’d actually be talking about very substantial rises in living costs for New Zealanders.  So unfortunately you only have one exchange rate.  The exchange rate is the assessment of what people things of the future of the New Zealand economy.  The quickest way to get it down would be to do some very reckless things that would actually put our economy at risk.

The interviewer, Rachel Smalley then asked him about Winston Peters’ Reserve Bank Amendment Bill.

StevenWell with the greatest respect to Winston, he’s been around for 27 or 30 years. . . . he’s never come up with a solution.  If there’s a problem in this country he’s part of it, because he’s been around for such a long time.  He had a time as Treasurer and never promoted these views as Treasurer, so now because he’s worried, and because he’s rightly worried about you know the big commodity manufacturers, and I am too, he’s promoting a snake oil solution that would achieve nothing. Because here’s the deal…

RachelOkay, his Amendment Act does have the support though in part, in general by David Parker, the Labour Finance Minister.

StevenWell I’m sorry that gives me no comfort whatsoever.

RachelHe says we face competitive devaluation abroad and we ignore it at our peril.

Steven Well I’m sorry, it’s truly ludicrous, and fundamentally it is a snake oil salesman solution, and Parker was called on the left this week by his own supporters on the left, who said what he’s arguing for, is he’s sitting in front of exporters and saying I want to make life easier for you, and then he’s turning around to New Zealanders and saying it will have no impact on you.  And fundamentally that is not the case, it’s dishonest and you can’t say it.

The dollar’s value is making business harder for exporters but the snake oil Peters and Parker are trying to sell would make life much more difficult for everyone – unless they can find a way to have two exchange rates.

High exchange rate not all bad


The New Zealand Manufacturers and Exporters Association is calling for action on the exchange rate, saying it has cost exporters $10.4 billion over the past three and a half years.

In February 2009 the NZ Dollar bottomed out at 52.3 on the Trade Weighted Index (TWI), but since then currency manipulation overseas and inaction in New Zealand have seen the NZ Dollar TWI rise to 72.9 in August. For every one percent the currency rises it costs New Zealand exporters approximately $200 million on an annual basis. Between February 2009 and August this year the NZ Dollar rose by 20.6 percent, and it has averaged 14.8 percent above the February level over the last three and a half years.

NZMEA Chief Executive John Walley says, “It is no wonder that we are seeing job losses in coal and aluminium with a statistic like this.  To put this in perspective New Zealand’s total annual merchandise exports are around $45 billion, so this is a hugely significant number compared to the margin on those sales.”

“Claims that nothing can be done to manage the exchange rate impact are only true in the context of our chosen macroeconomic framework – there are alternatives.  Witness the international evidence from countries such as Switzerland, the United Kingdom and the United States, that efforts to control exchange rates can and do work.” . . .

There is no doubt that a high exchange makes it difficult for exporters because it makes their goods and services more expensive.

But does the NZMEA’s calculations take into account the high exchange rate also makes imports cheaper and some of those – like fuel and machinery – have helped reduce costs of production.

That might not have offset the lower returns as a result of the higher dollar but does the $10.4 billion taken any account of it at all?

Various factors impact on the exchange rate. One of these is debt which is why the government is committed to returning to surplus as soon as possible.

But the main reason our exchange rate is so high is because the United States’ dollar is so low we are far to small to have an impact on that.

Labour thinks we could start playing with currency again. Someone should tell ’em they’re dreamin’.

Shades of policy past


Labour will require the Reserve Bank to do more to keep the value of the dollar down if it’s elected to government.

As an incoming government, Mr Cunliffe says, Labour would require the bank to “play a much more activist role in currency markets, intervening on occasion to impose costs on speculators and, if you like, make the New Zealand dollar less attractive as a risk punt”.

I wonder how that sits with the party leader? Phil Goff  was part of the Labour government which floated the dollar and part of subsequent governments which didn’t try to change that policy.

Mind you, a few more mad policies from the distant past like this and they won’t have to do anything to lower the value of the dollar, anyone with any sense will take their money elsewhere.

Exchange rate like the weather


The New Zealand dollar went up last night and is in sight of 2010 highs.

Every time this happens we get discussions on the exchange rate, the Reserve Bank Act and whether the latter should be changed to allow regulation of the former.

In spite of Labour’s mutterings on this – which is evidence more of an acknowledgement it’s unlikely to return to government soon than a real desire to meddle – there is very unlikely to be any change to the policy of a floating dollar.

Just like the weather the exchange rate is beyond our control. We can’t change it, we have to learn to manage its affects.

Exchange rate woes


Travelling in Europe we might have welcomed a strong New Zealand dollar, but it’s difficult to consider the dollar is high when it takes more than two to buy a euro and if it costs a dollar at home it usually costs a euro here so everything is twice as expensive.

Besides anything we gained while here will be more than cancelled out by the impact of the exchange rate on sales of meat,wool and milk.

The $NZ was at 59 US cents when Fonterra announced its forecast payout for the season. It hit a 10 month high of 66.9 cents this week.

The forecast payout for this season hasn’t changed but MAF economists are prediciting next season’s payout will be lower before recovering a bit in the 2011/12 season.

Tracking the $US – updated


The value of the $US dollar matters to New Zealand because a lot of our exports are traded in that currency and every cent it goes up means lower returns for our produce.

Recent rises in the exchange rate haven’t been because our dollar has become more popular, they’re more because the $US has fallen.

The graph tracks the changes in the value of the $US against the currencies of five key dairy trading nations from 2002 until the end of May:

 dairy 1

From April 1 to May 29 the $US fell 12% against the Brazilian real (purple line); 11% against the $AUs (red line) 10% against the $NZ (blue line) 5% against the euro (green line) and 1% against the Argentinean peso (pink line).

Our dollar fell three cents against the $US yesterday reflecting both a rally in that currency and concern about the 12% fall in the price Fonterra got in its latest globalDariyTrade auction.

UPDATE: Matt Nolan and Paul McBeth have corrected me: the increase in the value of the $NZ is due to both the fall in the $US and popularity of the $NZ.

Exporters Irked by Nat’s Monetary Policy Stance


The NZ Manufacturers and Exporters Association is not impressed by National’s support for the current monetary policy.

The party’s defence of the current system failed to acknowledge the damage the policy had caused to New Zealand’s tradeable sector, association chief executive John Walley said.

The approach used interest rates dictated by the Reserve Bank’s official cash rate to curb demand and influence inflation.

That approach had seen exports dropping from 33% of GDP in 2001 to 22% in 2007.

“What we are seeing at the moment is increasing fuel and commodity prices driving inflation which in turn is holding up interest rates and exchange rates.

“These forces are unlikely to stop any time soon so we need to break the link between inflation and the exchange rate,” he said.

He’s right about the problems but I’m not convinced playing politics with monetary policy is the solution.

Associate Finance Minister Trevor Mallard last week announced that the Government was open to looking at alternative monetary policy settings.

National finance spokesman Bill English said now was not the time to start tinkering with a monetary framework.

The Reserve Bank recognised the effect that international oil and food prices were having and the central bank was not going to strangle the economy because of imported inflation.

“It has been well recognised by government officials and commentators that increases in government spending, poor quality spending and increases in government charges are also stoking inflation domestically,” Mr English said.

“Trevor Mallard would be well advised to focus on these inflation factors, rather than signalling a drastic rethink on monetary policy,” Mr English said.

Quite. I have never been able to understand Labour’s belief that their spending of public money is not inflationary but allowing us to keep more of what we earn would be.

Mr Walley hoped National was making a typical election-year response.

Unless policy changes were made, all that could be expected was more of the same as the trade balance deteriorated and the economic situation worsened, he said.

A more responsible approach to the spending of public money might make a difference without the need to make monetary policy a party political issue.

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