Manufacturing activity slumps in June

New Zealand’s manufacturing sector continued to weaken in June to reach one of its lowest levels of activity since the survey began, according to the Bank of New Zealand - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for June stood at 45.7, which was 2.2 points down from May. This was the second lowest result recorded since the survey began in 2002 (the lowest being 43.7 in November 2005), and the third time in four months that the survey has indicated contraction in the sector.

A PMI reading above 50.0 indicates manufacturing is generally expanding; below 50.0 that it is declining. PMI values for June in the years 2002-2007 ranged from 52.6-62.4, with an average score for all months over the history of the survey standing at 54.1.

The last period of contraction for the sector, during 2005, was mingled with months where overall activity levels expanded. But Business NZ chief executive Phil O’Reilly says the current run of data shows a more persistent trend downwards.

“The first half of 2008 has been the toughest six months manufacturers have had to deal with for some time, with the possibility of ongoing contraction for the next half of 2008.”

Activity in some sub sectors was showing expansion, such as machinery & equipment, while the textile, clothing, footwear & leather sector has bounced back from a series of declines. However, almost three quarters of manufacturers are experiencing the outcomes of a general downturn in the economy, weak global growth, and rising costs of raw materials. The JPMorgan global PMI, experiencing a decline in activity for the first time in five years, puts into context what New Zealand manufacturers are facing at present.

The Bank of New Zealand highlights soaring input costs as the most notable feature of the June result. Senior market economist at the bank, Craig Ebert, says raw material prices were hitting firms hard and could well press higher yet.

“This is adding to a big squeeze on profitability, at a time when sales are stalling. Cash has thus become king, and managing costs paramount," says Ebert.

Unadjusted results for June showed contraction in activity for all parts of the country. Both the Northern and Canterbury/Westland regions (42.2) recorded the same and lowest level of activity since the survey began. However, the reasoning behind the results was different, as the Northern region suffered low production and new orders, while Canterbury/Westland saw a general fall with all five sub-indexes. Both the Central (45.6) and Otago/Southland (47.9) regions also showed contraction in June.