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Recent key developments in MAKE│NZ
It’s been a long time coming, and we’re finally here…
The fiftieth edition of Manufacturing Matters – Tuesday Top-Up!
Of course, we couldn’t have made it here without the support of all you who check in every week to find out the latest in manufacturing. We want to make sure that the next fifty issues continue to be focused on what YOU want, so let us know, what’s a topic you’re burning to know more about but just don’t have the time?
In recent editions of this newsletter, we wrote a fair bit about the impact of the various tariffs imposed by the current US government. Now those of you eligible to attend our Fireside Chats get a chance to hear about that impact from those who actually have to deal with the issue. We’ll hear from three Canterbury manufacturers, all of whom have the US as an important export market. The event will be held on Monday, Sep. 8th, and if you’d like to attend but haven’t received an invitation yet, please let me know: dieter@makenz.org
We decided to try a slightly different approach for our in-person events. To date, Fireside Chat events and Production Managers’ meetings were characterised by targeting different audiences. We’re now taking a different approach, using a common invitation list for both, but emphasising the different target content: Fireside Chat events deal with ‘industry issues’, including longer-term trends and advocacy on behalf of manufacturing. Production Mangers’ meetings will continue to focus (more) on operational matters, usually with the way the host company deals with the operational issue on hand as a launch pad.
Recent key developments in New Zealand
•Last week New Zealand’s Housing Minister, the Hon. Chris Bishop, gave an interview worth taking note of. In it he said that [5:25 min in] in response to the question whether house prices dropping, especially in Auckland, was a good thing “I think it is. We’ve got to decouple the idea that the New Zealand economy is driven by house prices. Actually, it’s ‘artificial wealth’, and real productive wealth comes not from house prices, but from investment in manufacturing and technology [author’s emphasis] and other things that actually drive productivity growth and drive higher wages. So, I think it is [a good thing], and that’s what government is trying to do over the medium to long term, it’s to drive house prices down, and also to drive rents down …”.
Worth noting indeed. For years many voices, including the late Sir Paul Callaghan, have pointed out that New Zealand’s economy suffers from a mis-allocation of capital. But most people are rational investors, and if the ROI on buying a residential property is higher than investing in shares of a manufacturing company, for example – of which preciously few actually offer shareholders a chance to invest – that’s where they will put their money. And the result is this – property related activities are the biggest contributor to our GDP, which is quite unlike the situation for most other OECD countries:
The reality is that (residential) property investment is – depending on government tax and other policy settings – not inherently particularly lucrative. The attraction comes from speculative gains as property prices keeping rising well above the general rate of inflation. Thus, the way to make investment in (residential) property less attractive is to reduce the capital gains part of the equation. Or, to put it simply and quote Minister Bishop: “… to drive house prices down …”
Government has many levers to put downward pressure on property prices. But most New Zealand politicians – keen to get re-elected –regard advocating for a reduction in property prices as equivalent to ‘touching the third rail’. All the more kudos to Minister Bishop for stepping up. It will be interesting to see whether his colleagues will follow and adjust economic development policies accordingly, for example by taking measures to support growth in manufacturing. The fact that the Prime Minister poured cold water on the idea straight away yesterday morning (“ …what we want to see is modest consistent increase in house prices …”) doesn’t bode well. Nor does the fact that the leader of the opposition, Chris Hipkins, demonstrated his fear of the third rail and refused to second Chris Bishop’s move in an interview this morning.
•We mentioned food price inflation briefly last week. But how good or bad is the situation for New Zealand citizens, compared to other countries? Comparing incomes across countries is challenging and The Economist has, for years now, proposed a ‘rough and ready’ way to do it – their Big Mac Index. It is essentially a measure of how many McDonalds Big Mac hamburgers the average citizen could afford to buy – based on average pre-tax earnings and local prices. The international ranking looks like this:
However, when adjusting for the fact that average hours worked differ markedly between countries and expressing it in terms of Big Macs earned per hour worked, New Zealand’s ranking drops to 15th.
The Big Mac Index is far from perfect. One of its shortcomings is that it is based on average incomes and does not reflect inequalities in income distribution.
•Related to both items above is a basic statistic we don’t often talk about: The Labour Income Share [LIS] – the proportion of a country’s GDP arising from salaries and wages:
The size of a country’s LIS tells us – among other things – something about the structure of its economy. Very high labour shares might indicate high labour costs that could affect a country’s competitiveness, while very low shares might suggest an economy overly dependent on capital or natural resources rather than human productivity. Service-oriented economies often have higher labour shares than capital-intensive manufacturing or resource extraction economies. Very low labour shares might indicate an economy heavily dependent on natural resources or highly automated industries. If we look at the graph above, we find New Zealand at the lower end, and that position is unlikely to be due to “highly automated industries”. Note that the LIS doesn’t tell us much, if anything, about a country’s wealth. Norway and Chile are sitting side by side, both due to their high reliance on natural resources (oil & gas, and minerals (copper), respectively), but vastly different in wealth per capita.
The other question is what happens to the LIS over time. In New Zealand, as in most OECD countries, it has fallen over time, and is continuing to do so:
The ‘measured sector’ in the above consists of all industries in the primary and goods-producing sectors, plus some service industries.
What’s driving this? While simple explanations in economics are tempting, they can also be misleading. However, at least to some extent changes in LIS reflect the relationship between productivity growth and wage growth. If productivity rises faster than wages, the labour share falls. This can indicate whether workers are benefiting from economic growth or if gains are primarily flowing to capital. In New Zealand:
In the US there has been a particularly sharp drop in the LIS over the past 20 years:
In 2019, the McKinsey Global Institute published a very detailed analysis of the above. It links the drop in LIS to the slow income growth and the growing gap between median wages and labour productivity observed in the United States but points out that is not the only factor at work here.
(What) does it matter? Whether you enjoy (from a distance) and approve current developments in the US or not, fact is that a central theme in the recent US presidential campaign of Donald Trump and JD Vance was the promise to create jobs with decent pay for hard-working people, serving both as an appeal to working-class voters and as justification for their economic platform. It was, among others, a promise to turn around the fairly dramatic decline in the US LIS over the past 20 years.
Recent key developments in the World
•A brief US Tariff update, just in case you haven’t been made aware of it already. The current basket of US import tariffs was derived through two different mechanisms, Presidential Executive Orders, or under section 232 of the US Trade Expansion Act of 1962. The act “allows the President to impose restrictions on goods imports … if …the quantity or other circumstances of those imports threaten to impair US national security.”
Under this provision, US imports of milled steel and a range of ‘steel mill articles’ from all countries except Canada and Mexico have been attracting a 25% tariff since March 2018. At the same time, ‘aluminium articles’ attracted a tariff of 10%, again from all countries except Canada and Mexico.
That tariff regime was amended in January 2020, and further in February 2025 for products of aluminium and steel, increasing the aluminium tariff to 25% and applicable to all countries.
Through an Executive Order on June 3, 2025, the US President increased the tariffs to 50% on imports of “steel articles and derivative steel articles, and aluminum articles and derivative aluminum articles” from all countries (except the UK).
And finally, and probably most importantly for New Zealand manufacturers exporting to the US articles (machinery and equipment, or components thereof) containing steel and/or aluminium, on August 19, 2025, the US administration expanded its 50% steel and aluminium tariffs to include an additional 407 additional product categories. The details of these categories can be found here.
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