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Improvement in Domestic Market Exceeds Expectation

Improvement in Domestic Market Exceeds Expectations

“Better than expected sales on the domestic market and improved profit expectations were the main factors in the improvement in manufacturers business confidence in the December quarter WestpacTrust Manufacturers Business Opinion Survey”, said David Moloney, President of the New Zealand Manufacturers Federation. The survey is based upon the NZIER’s Quarterly Survey of Business Opinion (QSBO) – but includes all manufacturers.

“The improvement in domestic demand allowed more manufacturers to increase prices in the quarter, recovering some of the increase in costs the faced earlier in the year. The recent appreciation in the currency means less firms are reporting rising costs. ” While further price rises are expected in the March quarter the longer term outlook for inflation is more positive suggesting price increases are less likely further out.

In addition, more firms are reporting greater improvements in productivity. With better productivity growth expected to continue into the March quarter, coupled with lower cost pressures, manufacturers expect profitability to improve in March.

The best news for 2001 was a rise in investment intentions. Manufacturers are finding it harder to recruit skilled and unskilled staff and there is a growing realisation that increased investment is essential if the current rate of growth is to be maintained.

Exports still remain the main driver of growth in the sector, despite the improvement in domestic sales, and manufacturers remain optimistic about the prospects for growth in export sales. While exports to Australia have slowed, our competitive currency will continue to help exporters in other markets.


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.

Business confidence has improved sharply from -43% in the September quarter to +24% in the December quarter. Much of the improvement in confidence was due to better than anticipated domestic sales growth in the December quarter.

This improvement in domestic demand in turn allowed more manufacturers to increase prices on the domestic market. With a rise in the number of firms increasing prices and a fall in the number of firms reporting cost increases the profit outlook of the sector has become more positive. The outlook for profit expectations is the main driver of business confidence.

The improvement in domestic activity appears largely due to better returns being generated by the primary sector. Domestic activity was much stronger in the Lower North Island and South Island but was still flat in the Upper North Island.

The best news for 2001 is an improvement in investment intentions. With a tight labour market, investment in additional manufacturing capacity is essential if the sector is to contribute to stronger economic growth.

Domestic Market Stronger than Expected

The domestic market has continued to improve more quickly than anticipated by manufacturers. In September a net balance of 6% of manufacturers expected their domestic sales to decline in the December quarter. In fact a net 9% of manufacturers were able to report an increase in sales for the quarter.

There was a significant regional variation in the results for the December quarter. A net 4% of Upper North Island manufacturers reported a fall in domestic sales in the December quarter. In sharp contrast a net 24% of Lower North Island and 28% of South Island manufacturers reported an increase in domestic sales.

Manufacturers, however, are still cautious about the level of improvement in domestic demand. A net 10% of manufacturers expect domestic sales to rise in the March quarter, following the net 9% reporting a rise in sales during the December quarter.

It was the first quarter in five years where small and medium sized manufacturers
(0 - 100 employees) have reported a stronger improvement in domestic sales than large manufacturers. It appears larger manufacturers were more focussed on growth in export markets, so were less able to respond to the unexpected rise in domestic demand.

Export Sales Still Leading Growth

A net balance of 28% of manufacturers reported an increase in export sales in the December quarter, compared with 15% in the September quarter. While the outcome was a little below expectations, there has been an increase in the number of firms expecting to increase sales in the March quarter (40%).

The results were very strong for South Island manufacturers. A net 46% of these manufacturers reported an increase in export sales in the December quarter, the highest result since December 1994. They are even more confident about the March quarter, with a net 64% expecting to increase export sales during the quarter.

Larger companies continue to achieve much better export growth with a net 41% reporting higher export sales in the December quarter. In contrast, a net 13% of small and medium manufacturers (0 - 100 employees) reported an increase in export sales in the quarter.

Short-Term Inflation Pressures Strengthen

A net 37% of manufacturers reported an increase in prices in the December quarter, well up on the 17% in the September quarter. The major change in this quarter was a significant upturn in the number of domestic manufacturers increasing prices. In the December quarter a net 27% of domestic manufacturers increased prices, compared with a nil balance in September. A net 27% of domestic manufacturers expect to raise prices in the March quarter.

More exporters were able to increase prices in the December quarter than in the previous quarter, with a net 40% reporting an increase in prices. The recent appreciation in the currency has so far not had a major impact, with 35% of exporters expecting to increase prices in the March quarter.

Cost Pressures Expected to be More Muted

A net 50% of manufacturers reported a rise in costs in the December quarter, slightly down on the 57% in the September quarter.

The recent rise in the currency and falling oil costs seem to have significantly dented firms expectations that costs will rise. A net 36% of firms now expect costs to rise in the March quarter, well down on the net 62% expecting cost increases in the December quarter.

Investment Intentions Improve

A net balance of 8% of manufacturers plan to increase spending on plant and machinery over the next 12 months. This is a strong turnaround from the -4% recorded in September.

Investment intentions for firms selling only on the domestic market are still flat, with a net balance of 2% of manufacturers planning to reduce spending on plant and machinery. In contrast, a net 12% of exporters plan to increase spending on plant and machinery.

Investment intentions, however, are much higher in the Lower North Island and South Island, reflecting the much stronger domestic growth in these regions.

Employment Levels Stronger than Expected

The stronger than expected improvement in domestic demand contributed to employment growth in the Lower North Island and South Island. A net 26% of Lower North Island manufacturers increased staff levels, while in the South Island a net 19% of firms took on more staff. By comparison and reflecting the difference in business activity, Upper North Island manufacturers were still shedding staff, with a net 6% reducing employee numbers in the quarter.

Future expectations for employment are still flat with a net 1% of firms expecting to reduce staff in the March quarter, reflecting strong productivity improvement expectations.

Stock Levels Under Control

Manufacturers are more comfortable with finished stock levels, but still plan to continue to reduce raw stocks and finished stock levels. A net 5% of firms plan to reduce raw material stocks while a net 9% plan to reduce raw material stocks.

Labour Market a Constraint on Growth

6% of manufacturers in the quarter identified labour as the single factor most limiting their ability to increase turnover. This was a consistent concern across all regions with 6% of Upper North Island, and 5% of Lower North Island and South Island manufacturers, identifying labour as their most significant constraint.

Manufacturers are reporting it is harder to find both skilled and unskilled labour, so appear to be focussing on improving higher productivity to achieve higher growth.

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