Manufacturing Crisis, Who to Believe?

The joint manufacturing report from the opposition parties was released at the same time that the Government was attempting to celebrate an economic upturn. For those who listen to the spin rather than looking at the detail it appears to be all rather confusing; the Government is celebrating an economic upturn that they claim is the result of their good management, while the opposition is claiming things aren't so good and major changes are needed.

It can't be denied that there is more economic activity than there has been in the previous few years but a closer look at what is driving this makes it clear that the recovery is patchy and probably not sustainable. Three main areas are supporting the current economic upturn; the Christcurch rebuild, Auckland's buoyant property market and our agricultural exports. If you are involved in the construction industry, property investment or the dairy industry, things are looking rosy, but if you are attempting to buy your first home or are trying to export high tech manufactured products then times are tough. This isn't a balanced recovery and the manufacturing report highlights the fact that if we want to really grow jobs and raise living standards in New Zealand then we have to do more to support our manufacturing sector. 

The government is supporting the easy money that is coming out of the dairy sector and is ignoring the fact that the industry may have already gone beyond a point of environmental sustainability. Rather than ensure that the existing dairy herds are being managed with minimal environmental impact, the government is spending up to $400 million on irrigation schemes and has decided to stop comprehensive environmental reporting. The recent drought was thought to be a precursor for future climate trends and for such a water dependent industry as dairying this should indicate some caution is needed when regarding future expansion. The number of jobs that will be generated from further growth in this industry may also be limited, farms are larger and less labour intensive and we seem to be employing greater numbers of imported workers. Due to the huge costs involved in buying and setting up dairy farms much of the income generated is profiting Australian Banks rather than increasing government revenue.   

The Christchurch recovery is also problematic in terms of broad benefits. Fletchers has a monopoly over the construction industry, and even more so with the demise of Mainzeal, and the lack of competition is causing delays, raising the costs of construction materials and driving down wages. The Canterbury region is also attempting to deal with the recent loss of over 4,000 workers from the industry and much of the needed workforce will be imported. Rather than most incomes of construction workers being spent locally, and boosting the domestic economy, many wage packets will leave the country. It also appears that the amount of money available to support the rebuild is being restricted with many insurance companies and EQC paying out less than what was expected and the Government is putting pressure on the Christchurch City Council to sell its assets. Rather than using an earthquake levy to help finance the recovery, as the Greens suggested, the Government has decided to continue to borrow and increase our already sizable public debt. 

The Auckland property market is seeing another bubble emerging with investors again seeing property as a lucrative area. At the same time we have a huge demand from lower income earners for affordable properties to buy or rent. With the Government supporting the reduction of compliance costs and opening up greenfield areas for development, we will still see developers continue to favour elite housing and support for a continuation of inflated prices. Already New Zealand's private debt is huge and the borrowing that will occur because of the current property boom will only increase as people are tempted to take on large mortgages.  

New Zealand desperately needs to develop a sustainable economy and the areas that are supporting the current recovery have obvious limitations. Investing more into high value exports would mean an increase in research and development and a growing demand for a skilled workforce. A stronger manufacturing sector would broaden our export base, leave us less reliant on one or two industries (the demise of one would be catastrophic).  The resulting growth of a higher skilled workforce would raise living standards, increase government revenue and boost the domestic economy. 

The major recommendations in the report just seem to be commonsense to me:

Recommendation 1: The government adopt macroeconomic settings that are supportive of manufacturing and exporting, including:

•   a fairer and less volatile exchange rate through reforms to monetary policy;

•   refocusing capital investment into the productive economy, rather than housing speculation; 

•   and lowering structural costs in the economy, such as electricity prices.

Recommendation 2: New Zealand businesses are encouraged to innovate. Research and Development tax credits, with a stronger emphasis on development, should be introduced as part of a package for innovative manufacturing, supporting exports and quality jobs.

Recommendation 3: The Government adopt a national procurement policy that favours Kiwi-made and ensures that New Zealand manufacturers enjoy the same advantages as their international competitors.

John Key and his Government are desperate to present a positive spin on the state of the economy, but in doing so they are not telling the full story and are promoting false hopes. It is good luck rather than good management that has got us through the last four years and it won't be long until even luck will be in short supply. With its huge investments in uneconomic motorways and subsidising the dairy industry (with its grand irrigation schemes and changing the ETS) it is obvious that no lessons were learned from the demise of Solid Energy.