Soggy manufacturing makes exchange rate intervention dangerous

A senior economist dismisses the need to intervene in the exchange rate, sayings at best it would be ineffective – at worst, dangerous.

The latest BNZ-Business New Zealand performance of manufacturing index has fallen further below the expansion line, now sitting at 48.2.

Anything above 50.0 indicates expansion in the manufacturing sector. The latest result is up 0.8 points from August, but is the fourth consecutive month of no expansion in the sector.

BNZ senior economist Craig Ebert admits the data looks worryingly weak, but he says talk the industry is in crisis is overblown.

He told NBR ONLINE other recent manufacturing surveys looking at future expectations show manufacturers remain positive.

“The index is still soggy and, strictly speaking, consistent with a slight contraction. In normal circumstances this would be worrying.”

Mr Ebert is not ruling out further weak manufacturing results but he knows firms are still expecting to expand.

He says for the most part an expectation of solid export numbers is holding up confidence in the sector rather than an expectation of increased domestic sales.

“The common belief is the manufacturing sector is in ‘a crisis’ because the exchange rate is too high. Well, this survey information overall does not justify that.”

He says manufacturers he has surveyed are not downbeat about exports.

Mr Ebert refuses to buy into the suggestion put forward by opposition political parties arguing for the Reserve Bank to intervene to lower the exchange rate, primarily by printing more money.

“The debate around Reserve Bank intervention in the exchange rate has over-extended itself. It should really fall over at the first question, which is can we actually influence the exchange rate?

"People are talking on the basis that we can and somehow sustainably we can bring it down. Well, you first have to question how on earth that can be done. For the most part, it’s extremely difficult.”

New orders (45.9) fell to their lowest value since May 2009 and Business New Zealand’s manufacturing executive director Catherine Beard says the drop may have an adverse effect on production numbers in the months ahead

According to the survey, central region manufacturers are the most positive, on 53.1 points.