Uncertainty about the exchange rate is putting manufacturers off investing in the sector.
The Manufacturers and Exporters Association's latest survey of business conditions shows net confidence rose to 33 points in May, the first month that the indicator has been in positive territory this year. In April, it stood at -9.
The association says the big improvement was off the back of a drop in the exchange rate but it doesn't expect the kiwi to fall back to a fair value and stay there.
Chief executive John Walley says the sector favours macro-prudential tools like the loan-to-value ratio mechanism being considered by the Reserve Bank as a way of controlling asset speculation without putting upward pressure on the dollar.
He says it seems that until conditions become more predictable with respect to export returns, people will invest where they have to - but few are investing in significant capacity or productivity gains.
Mr Walley says that means things will erode over time and the sector will lose competitiveness and market.
"If we don't have the activity here, we'll see people moving activity offshore," he says. "We'll see people closing down activity here and walking away from the business, so that means less activity in New Zealand - and for almost any product in the world there are lots of competitors."
Mr Walley says the gross numbers for the real or traded economy have essentially been static since the middle of 2005.
