WELLINGTON - A combination of falling productivity and rising wages is undermining New Zealand manufacturers' competitiveness in export markets, says National Bank chief economist Brendan O'Donovan.
Though recent export data shows some firming in manufactured exports, the performance of the sector in the wake of a steep fall inthe exchange rate since 1997 has been disappointing, especially compared with, say, the tourism industry.
Some of that, Mr O'Donovan said, could be put down to manufacturers faced with a weak domestic market lacking the cash to invest in new markets overseas. Another influence was third-party competition, from countries, especially in Asia, whose exchange rates have fallen even more. But some of the weak export performance had to be laid at the door of rising unit labour costs, Mr O'Donovan said.
Whether you measure the labour input in terms of numbers employed or hours worked, manufacturing productivity is heading downhill. The fact that decline is steeper under the employment measure suggests manufacturers have been hoarding labour, preferring to maintain staff levels but cut back on the hours worked per employee.
"Admittedly, the poor productivity performance is partly cyclical. It is hard to improve productivity in a declining sales environment," he said. To the extent that that cyclical factor is behind the productivity decline, there is the possibility of a rapid improvement in productivity when sales pick up.
But Mr O'Donovan suspects weak sales cannot fully account for the weakness in productivity. Investment by manufacturers, for example, has fallen by about 25 per cent over the past year. In any case, in an environment of weak sales and declining productivity, the fact that manufacturing wages had been growing at around 3.5 per cent a year (significantly faster than wages in the rest of the economy) was hard to fathom.
"It's just not justified by the prices producers have been getting or by productivity growth, which has been abysmal," he said. "At a time of weak demand and tough competition you normally expect to see a strong focus on productivity and tight cost control."
If the current economic recovery is to be sustained, domestic consumption will have to be balanced by an improved export performance. A favourable exchange rate is crucial for the latter, but so are unit labour costs. Mr O'Donovan said that while manufacturers had no control over the exchange rate, on unit labour costs the ball was in their court.
