Slight comeback for manufacturing activity in July

New Zealand’s manufacturing sector made a slight comeback in July, but activity levels are still contracting, according to the Bank of New Zealand - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for July stood at 48.8, which was 3.5 points up from June and similar to the result for May. This was the fourth time in five months that the sector experienced contraction, with activity in three of these months in a tight range of between 48.4 and 48.8.

A PMI reading above 50 indicates that manufacturing is generally expanding; below 50 that it is contracting. July PMI values in the years 2002 – 2007 ranged from 49.6 – 58.9, with an average score for all months over the history of the survey standing at 54.1.

Business NZ chief executive Phil O’Reilly said the part recovery in the seasonally adjusted result was encouraging, given the significant fall in June. However, the sector remained soft, echoing the general downturn throughout the economy.

“At this stage, it’s too early to tell whether the sector has yet turned a corner in terms of overall activity. The recent significant drop in the New Zealand dollar over the last few weeks will no doubt give exporting manufacturers a competitive advantage, which may encourage further activity in the months ahead.

“In contrast, on the domestic front, demand remains lacklustre and with ongoing rising costs for key raw materials and petrol still evident, many manufacturers are still finding day-to-day business operations a challenge.

Bank of New Zealand senior markets economist Craig Ebert said although several factors, such as the declining exchange rate, were riding to the rescue of New Zealand’s manufacturing sector, many more existing and emerging “issues” were weighing against its immediate relief.

These included the fact local business investment was looking a bit shaky, the construction sector here and overseas was tracking weakly and consumer spending on big ticket items was drying up.

“We can’t get too sanguine about manufacturing prospects, at least not for the foreseeable future,” he said.

Three of the five seasonally adjusted main diffusion indices continued to record weakness, although all improved from the previous month. Production (50.0) showed significant improvement from the 42.9 recorded in June, while deliveries (49.6) did likewise. Finished stocks (52.1) was the only sub-index to show expansion for July, while employment (46.3) displayed a similar result to the previous month, indicating significant contraction in those employed in the manufacturing sector.

Unadjusted activity for July showed three of the four regions still in decline. In the North Island, the Northern region (46.8) returned to the level recorded in April, while the Central region (44.9) continued to slip to its second lowest level for the year. In the South Island, the Canterbury/Westland region (52.5) expanded for the first time since March, while Otago/Southland (47.5) remained at similar levels to June.