WestpacTrust Manufacturers Business Opinion Survey
MARCH 2001 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.
Manufacturers business confidence fell sharply in the March quarter to -12%. This followed an even stronger rise in the December quarter, when business confidence peaked at 24%.
A range of factors contributed to this sharp turnaround in confidence:
- a much weaker economic outlook in our export markets, particularly Australia;
- the expected growth in the domestic market in the March quarter failed to appear;
- the recent fall in the Australian dollar impacted on exporters to Australia;
- recent weakness in the New Zealand dollar contributed to greater pressure on costs than expected;
- price increases were less than expected, particularly on export markets. Combined with stronger cost pressures, this led to a negative impact on profit levels; and
- firms were more concerned about high levels of finished stocks.
Manufacturers remain hopeful of an increase in output, but it is expected this will come increasingly from the domestic market. There are, however, some question marks about whether this is achievable. Several major problems include:
- overall employment levels are static but firms are finding it increasingly harder to get the staff they need, skilled and unskilled;
- the downsizing of manufacturing capability in New Zealand has meant that a lack of materials is becoming a greater constraint on firm growth. 8% of manufacturers reported that a shortage of materials and components was the single factor most limiting their ability to increase turnover; and
- weak investment intentions.
Constraints Limiting Growth
In past growth cycles strong export growth has quickly expanded domestic demand, with exporters taking on more staff, increasing orders from suppliers and purchasing more machinery and equipment. Growth in these three areas is currently constrained. This will in turn severely limit domestic growth opportunities until investment levels increase. In the current uncertain environment, however, growth in investment levels does not appear likely in the short term.
These constraints are also impacting on export growth. Major constraints noted by exporters in the March quarter were:
Materials / components 8%
A net balance of 10% of exporters reported an increase in new orders in the March quarter and a net 20% expect an increase in orders in the June quarter. However, with just a net balance of 4% of exporters planning to increase investment expenditure, and a net 8% reporting it is becoming harder to find unskilled staff, it is not clear whether exporters will be able to meet the expected increase in orders.
Domestic Market Deteriorates
A net balance of 3% of manufacturers reported a decline in domestic sales in the March quarter, a marked deterioration from the 9% reporting a rise in the December quarter. There were declines in domestic sales in the Upper North Island and South Island, but still reasonable growth in the Lower North Island.
Manufacturers remain optimistic that the domestic market will improve, with a net 9% of manufacturers expecting an improvement in the June quarter. This optimism is still quite regionally variable, with North Island manufacturers more confident of an improvement, while a net 2% of South Island manufacturers expect a decline in domestic sales.
A net balance of 10% of exporters reported a rise in export sales in the March quarter, well down on the net 28% recorded in the December quarter. Indeed, the result for the March quarter is the weakest since June 1998.
The downturn in export activity was much greater for large exporters (those with over 100 employees). A net 9% of firms reported a rise in export sales in the March quarter, compared with 41% in December. In contrast, export growth has remained strong among medium sized manufacturers (20-100 employees), with a net 18% reporting increased exports in the March quarter.
Inflation Pressures Moderate
A net balance of 20% of manufacturers increased prices in the March quarter, well down on the 37% result for the December 2000 quarter. This was also down on the 33% of manufacturers expecting to increase prices in the March quarter.
The downturn in both export and domestic activity meant both exporters and non exporters were constrained in their ability to pass on price increases. On the domestic market a net 18% of non-exporters were able to increase prices, compared with a net 27% planning to increase prices in the quarter.
The downturn in export markets has impacted significantly on pricing intentions with a net 20% of exporters expecting to increase prices in the June quarter, while a net 26% of non exporters plan to increase prices.
A net 43% of manufacturers reported an increase in costs in the March quarter, well above the net 20% reporting an increase in prices in the quarter. Combined with a slowing in productivity growth in the quarter, profitability was squeezed, with a net 19% of manufacturers reporting a decline in profits in the quarter.
The outlook for the June quarter is more positive, with a net 1% of manufacturers expecting a fall in profitability. A much smaller percentage of manufacturers are expecting cost pressures to rise in the June quarter, while a similar percentage of firms expect to increase prices.
Employment Levels Fall
Overall employment levels declined marginally, with a net 3% of manufacturers reporting a decline in employee numbers in the March quarter. A similar percentage expect to reduce employee numbers in the June quarter.
Employment growth, however, was strong in the Lower North Island, with a net 21% of firms taking on more employees and a net 4% expecting to employ more in the June quarter.
In the Upper North Island a net 15% of manufacturers reduced staff numbers in the March quarter, while the outlook for the June quarter is stable. The outlook for employment is weakest in the South Island, with a net 20% of firms expecting to cut employee numbers.
Stock Cutting Planned
A net 13% of manufacturers plan to reduce raw material stocks in the June quarter, while a net 9% plan to reduce finished goods stock levels. There have been small net increases in stock levels over the last four quarters. With the outlook for activity slowing, manufacturers have become more concerned about stock levels. A net 26% of manufacturers reported finished stock levels were too high in the March quarter, up from the 18% recorded in December.
Interestingly, large firms seem to have a greater problem with stock levels. A net 8% of large manufacturers (over 100 employees), increased their finished stock levels in the March quarter. As a consequence, 37% of large firms consider their present level of stock of finished goods to be too high.
Capacity Utilisation Increases
The capacity utilisation index increased to 90.58 in the March quarter. While this was up on the December index number of 88.38, the index was slightly down on the March 2000 result.
The index number has been higher since the sample was increased at the beginning of last year. A greater number of small companies (1 - 20 employees) were added to the sample boosting the overall index. These small companies consistently report a much higher index number because of the high number of firms reporting no spare capacity. In the March quarter 17% of small firms indicated they had no space capacity, while only 8% of larger firms indicated a lack of capacity.
The capacity utilisation index for exporters (89.25 in the March quarter) is consistently lower than the index number for non-exporters. This is due to the larger share of small firms in the non-exporter category. 51% of firms in the non-exporter category have 20 or less employees while in the exporter category the small firm share is just 15%.