WestpacTrust Manufacturers Business Confidence
OCTOBER 2000 QUARTER
WESTPACTRUST MANUFACTURERS BUSINESS OPINION SURVEY
This Bulletin summarises information from the WestpacTrust quarterly survey of manufacturers opinion prepared for the Manufacturers Federation by the New Zealand Institute for Economic research (NZIER). The survey is based upon the NZIER’s Quarterly Survey of Business Opinion (QSBO) – but includes all manufacturers - whereas the QSBO puts manufacturers of building products into a separate category. The WestpacTrust analysis also provides details on the size of firms, broad regional location, and distinguishes between exporting/non-exporting firms.
The outlook of manufacturers for the general business situation remains negative. A net balance of 43% of manufacturers expect business conditions to deteriorate over the next six months. This has barely changed from the – 45% recorded in the June quarter. There has tended to be a strong correlation between business confidence and profit expectations which are strongly negative for the December quarter.
Manufacturers are now more positive about their level of activity over the next three months. A net balance of 17% of manufacturers are expecting output to rise in the December quarter. This is a strong turnaround from the net 3% of manufacturers recording a fall in output in the September quarter.
A number of indications show that the downturn in the September quarter was not as bad as expected. For example, a net 7% of manufacturers in June expected their output to fall in the September quarter but 3% recorded an actual fall in output.
Domestic Inflation Flattened
The survey shows, however, that the increased activity does not help to improve manufacturers profit outlook because of the increasing cost pressures facing the sector. Manufacturers are finding it more difficult to pass on price increases in the domestic market, which still accounts for two thirds of their output.
Among companies selling only on the domestic market 23% were able to increase prices in the September quarter. However, since 23% of companies also reported they reduced prices in the quarter, a zero net balance for companies were able to achieve price increases. This was the lowest result recorded this year. With imports from China increasing in nominal dollar terms by 32% in the 12 months ended August and the fall in manufacturing output, such price constraint is not surprising.
Positive news is the growth in the number of exporters reporting price increases in the quarter. While a net 20% had expected to increase prices, a net 24% were able to achieve price increases in the quarter. There has already been some anecdotal evidence that the higher inflation rate in Australian is giving room for exporters to increase prices there.
While the number of exporters reporting price increases is still less than the number of firms reporting cost increases, there has been a big increase in the number of exporters planning to increase prices in the December quarter. A net 45% expect to be able to increase prices in the December quarter, well up on the 24% increase in prices in September.
Overall pricing intentions for manufacturing are up strongly in the December quarter but this reflects the improvement in prices exporters hope to achieve. There has been a small lift in pricing intentions for the number of companies supplying the domestic market with a net 16% of manufacturers planning to increase prices.
Cost Pressures Strong
For those companies supplying only the domestic market, there is a vast gap between the cost increases they are facing and the level of price increases they are able to achieve. As noted earlier, the number of manufacturers increasing prices in the September quarter was offset by the number of companies reducing prices. With a net 55% of these firms facing cost increases, profit levels have shrunk.
With 16% of these manufacturers expecting to reduce prices in the December quarter the prospects for a recovery in profit levels still appears distant.
Export Led Recovery Emerging
There are clearer signs of an export led recovery emerging with export growth expected to strengthen in the December quarter. Export growth expectations had weakened in June and this was reflected in outcomes for the September quarter. A net balance of 19% of manufacturers expected an increase in export sales in the September quarter compared with the net 37% expecting an increase in the June quarter. The rapid fall in the positive net balance for small to medium sized exporters suggests the short term slowing in growth may be due to the impacts of GST in Australia. Exporters are much more confident about an improvement in export sales in the December quarter.
Strong Regional Pattern
There are strong regional patterns in the level of output growth reported by manufacturers in the September quarter. A net 10% of manufacturers in the Upper North Island reported a fall in output, there was a zero net balance for Lower North Island manufacturers while a net 9% of South Island manufacturers reported an increase in output.
Interestingly, manufacturers in all regions reported an overall fall in sales on the domestic market and the level of companies reporting an increase in export sales was also similar across most regions. This would suggest manufacturers in the Lower North Island and South Island export a higher proportion of their total output than Upper North Island manufacturers.
This is also reflected in data for investment intentions with South Island manufacturers reporting much higher investment intentions than manufacturers in the North Island. In the September quarter a net 14% of South Island manufacturers indicated they would increase spending on plant and machinery over the next 12 months.
Medium Sized Companies Doing Well
The survey suggests medium sized companies (20-100 employees) have experienced better activity levels over the last three months. A net 8% of medium sized manufacturers reported an increase in output in the September quarter, compared with negative net balances of –8% for small manufacturers and –7% for large manufacturers.
The level of business confidence for these medium sized firms was –30% compared with –38% for small firms and –55% for large firms. Investment intentions were also significantly more positive with a net 15% expecting to increase plant and machinery investment over the next 12 months. There could be several reasons for the greater level of confidence among this group of manufacturers:
manufacturers in this group of companies are less likely to take forward exchange cover. This is perhaps reflected in the number of firms reporting cost increases. A net 65% of medium sized manufacturers reported an increase in cots in the September quarter compared with a net balance of 52% of large manufacturers. In the December quarter there is a partial reversal with more large manufacturers expecting cost increases. Forward cover helps companies delay the impact of exchange rate movements but they cannot avoid the longer term impact of the sharp fall in the currency.
The lack of forward cover means the medium sized exporters will have been able to benefit more quickly from the fall in the currency during the last quarter.
The rise in cost expectations for larger manufacturers may also reflect a greater level of concern about the impact of the 1 October introduction of the Employment Relations Act. A net 38% of medium sized manufacturers expect to improve productivity in the December quarter compared with a net 28% of large manufacturers. Job shedding is also expected by these larger companies, with a net 15% expecting to reduce staff numbers in the December quarter while a net 9% of medium sized manufacturers expect to take on more staff.
Capacity Declining as a Constraint
The capacity utilisation index increased slightly in the September quarter but the number of companies reporting capacity as a constraint has fallen. It appears the capacity utilisation index may have been influenced by the increase in the sample earlier this year. The number of small companies in the sample was boosted. Since the capacity utilisation index number of these small companies is much higher than for medium and large companies, they have contributed to an increase in the overall index.