BNZ head of research Stephen Toplis says it is certainly not all doom and gloom for New Zealand's manufacturing sector

Talk of the death of New Zealand's manufacturing sector is "wildly premature", BNZ's head of research Stephen Toplis says.

In a paper titled "Manufacturing In Crisis!?!" Toplis says the popular press would have you believe that we are seconds away from the complete and utter destruction of the entire sector.

"...The widespread perception is, indeed, that not only is the manufacturing sector dying but that its death will also undermine the New Zealand economic expansion that is underway."

Toplis agrees that there are a number of manufacturers who are really struggling and that the high Kiwi is having an adverse effect on many.

"But it is plain wrong to extrapolate from this that all and sundry are in a mess," he says.

"...Yes, there are serious issues facing the manufacturing sector and, yes, there are many manufacturers who are struggling and will struggle to survive. But talk of death of the sector as a whole is wildly premature.

"Furthermore, suggestion that all that is needed for success is an adjustment to the currency is misplaced. More importantly, there is clearly a significant chunk of the sector that is performing admirably and it’s about time that this was recognised."

Toplis says the New Zealand manufacturing sector represents 12.8% of  our GDP.

Of this 36% is food, beverages, and tobacco which is dominated by Fonterra and the meat processing companies. “Core” manufacturing is just 8% of GDP. In order of importance the next biggest manufacturing sectors are: - Petroleum, Chemicals, Plastics and Rubber (16% of total manufacturing); - Machinery and Equipment (14%); - Wood and Paper (12%); and - Metal Products (10%). All the rest of the sector accounts for just 17% of total including: Furniture; Non-Metallic Mineral Products; Printing, Publishing and Media; and Textiles and Apparel.

Toplis focuses in his research on the non-food sector as the food sector has unique characteristics and is often more influenced by climatic conditions than anything else.

"So, is the non-food manufacturing sector currently in terminal decline? Not according to official data produced by Statistics New Zealand. According to these data, non-food manufacturing has been trending slowly higher since its trough in March 2009. Over this period total output has increased 6.6%. Is this cause for celebration? No! Levels are no higher than where they were in 1994 and activity has been going nowhere for the last two years. But you could hardly define it as a collapse either."

Toplis reckons if there is a crisis in manufacturing, global over-capacity and the growth in emerging nations is its root cause.

"How long will it take before the plethora of new manufacturers in the emerging world face sufficient demand to warrant their continued existence? The extent of this problem should not be underestimated."

He says even in China, one of the major issues facing its expansion is the excess capacity in the manufacturing sector.

"No change in the level of the NZD will fix this problem."

Toplis says that a global comparison of manufacturing confidence reveals that New Zealand manufacturers are amongst the most optimistic in the world.

According to the latest ANZ business opinion survey manufacturing is the most optimistic sector in the country, with a net 48.7% of manufacturers optimistic about their outlook, which is 20.9 points above the average for this series.

Toplis says the BNZ doesn't suggest for a second that manufacturing output will return to its 2005 peaks anytime soon, but the medium term outlook for the “core” manufacturing sector looks relatively promising: - New Zealand trading partner growth is expected to be at or above average; and - The building sector is set to boom and will support domestic sales.

"However, there is unlikely to be substantial relief from the currency and global excess supply will remain problematic. Moreover, the food and beverage sector will suffer, ultimately, from the current drought."