What Is the Impact of Shocks to Imports by Stage of Production on the Manufacturing Sector Output and Employment Growth?

Abstract

What is the impact of positive global, advanced economies and emerging market trade uncertainty, and the R/US$ exchange rate volatility shocks on the manufacturing sector output, investment and employment growth? We find that heightened trade uncertainty shocks depress activity in the domestic manufacturing sector. The decline in investment growth is more than double that of output growth. Furthermore, we establish that the R/US$ exchange rate volatility amplify the decline in the manufacturing sector output and employment growth decline in response to positive global trade uncertainty shocks. The propagation effects are particularly pronounced on account of the permanent R/US$ exchange rate volatility component. Similarly, evidence shows that low business confidence amplifies the decline in the manufacturing sector output and employment growth due to positive global trade uncertainty shocks. Thus, the concurrence of heightened global trade shocks, R/US$ exchange rate volatility shocks and low business confidence is not good for the domestic manufacturing sector output, investment and employment growth. It is imperative that policy makers address issues that lead to heightened trade policy uncertainty, embark on policy interventions that reduce the exchange rate uncertainty and boost (strengthen) business confidence.