Profits rise, but investment falls

By BRIAN FALLOW

WELLINGTON - Investment in manufacturing continued to decline last year despite a strong recovery in manufacturers' sales and profits.

WestpacTrust's quarterly analysis of the sector said that manufacturing sales (excluding primary product processing) in the December 1999 quarter were up 10.6 per cent in real terms on a year earlier, the largest annual increase for five years.

Profits, in relation to sales, were nearly 50 per cent higher than in 1998.

But real investment was down 0.3 per cent on year-earlier levels, the seventh negative quarter in a row.

"With profits rising throughout 1999, the lack of investment in new plant is baffling," WestpacTrust said.

Nervousness surrounding the election, and Y2K may have caused some investment decisions to be delayed, it suggested.

It expected the March data to show a sharp turnaround in investment, reflecting favourable conditions for manufacturers.

In the New Zealand Institute of Economic Research's March survey of business opinion, a net 22 per cent of manufacturers expected to increase investment in plant and machinery over the next 12 months, up from a net 13 per cent in December.

"Manufacturers seem to be taking a wait-and-see approach until the economic expansion becomes broader-based," WestpactTrust said.

As evidence of the same caution, it cited the drop in manufacturers' interest payments over the past two years, a drop much steeper than could be explained by lower interest rates and which therefore indicated a lowering of debt levels.

ManFed economist Peter Crawford said growth was pretty weak for noncommodity manufacturers. Total sales for the December year were up 2.1 per cent, whereas sales of forest-based commodities (sawmilling, panel products, pulp and paper) were up 15 per cent, and other resource-based commodities up 8.9 per cent.

"It is really only in the last couple of months we have seen a sustained pick-up in exports of elaborately transformed manufactures. For example, in the three months to February, those exports were up 19 per cent. So the recovery is only getting under way for a lot of firms, and some are already beginning to see a slowdown," Mr Crawford said.

The institute's survey showed that while investment intentions were up, employment intentions were down.

The Auckland Employers and Manufacturers Association survey was picking up that employers were increasingly concerned about the industrial relations situation.