Permanent Downward Shift

The New Zealand Treasury recently issues the following picture.

Their spokesperson said that the impact of the global financial crisis on the NZ economy was not purely cyclical. After most downturns, the economy usually recovers quickly and returns to the growth path that it was on before the crisis. Their analysis suggests that this will not happen with this crisis, so the lost output will not be restored.

The Treasury is worried that the government will not receive the same level of tax revenue as before. I am more worried about the loss of output. I dug into the numbers to identify the sector where the output has been permanently lost. What I found is interesting. The services sector is doing fine. Agriculture has struggled, but is still doing okay. The construction industry declined rapidly at the end of the housing boom, but will eventually recover when growth population increases the demand for housing. The retail sector has been flat. Nothing striking in any of these!

The big change has taken place in the manufacturing sector. The middle column of the table below, shows the change in sales adjusted for price change in the manufacturing sector between 2007 and 2010. The right-hand column expresses this change as a percentage. The column on the left shows the original size of the industry.

Source: Statistics NZ

The only industry to grow is paper and paper products (so much for the paperless office). Most other industries have lost at least a hundred million dollars of sales. The larger industries have lost more than two hundred million dollars of sale. Looking at the entire manufacturing sector sales of nearly two billion dollars have disappeared from a sector worth eleven billion. This is the equivalent of our entire forestry-related industries disappearing overnight (Wood and Paper Products). Fill jobs in Manufacturing declined by 17 percent over the same period.

Some of the activity may return when the construction sector recovers, but I presume that most of this activity is gone forever, possibly to China.

This is the Permanent Downward Shift in Output. Putting it more bluntly, the manufacturing sector has been gutted in the last few years.

One reason is lack of demand from trading partners. The other reason is the Reserve Bank's policy of keeping interest rates high to kill the housing boom. The high interest rates caused problems for real businesses. They also attracted speculators, which strengthened the New Zealand exchange rate, which put pressure on exporters. This was a double whammy for manufacturers.