Manufacturing activity remains in contraction in September

New Zealand’s manufacturing sector remains in contraction, according to the Bank of New Zealand - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for September stood at 47. Although this was up 1.3 points from August, the sector has now been in decline for five consecutive months, which is the longest period of contraction since the survey began in 2002.

A PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining. PMI values for September in the years 2002-2007 ranged from 51.0-58.7, with an average score for the previous September results of 54.9.

Business NZ chief executive Phil O’Reilly said the record period of contraction shows little sign of easing going into the last quarter of the year.

“Recent turbulence in the financial markets is having a flow on effect to other areas of the global economy, including manufacturing. The global PMI now shows a fair degree of turmoil, with contraction at its fastest rate since 2001 as most of the world’s largest manufacturing bases face tough operating conditions.”

Mr O’Reilly says the ripple effects of this are likely to be felt in New Zealand for some time to come, as economic uncertainty bites into new orders and firms look to reduce staffing levels.

“Recent movements of the New Zealand dollar against the US will be welcomed by those exporting, but this is tempered by increases against the Australian dollar - the market many firms look to dip their toes into when first selling offshore.”

Bank of New Zealand senior markets economist Craig Ebert says despite present gloom in the world economy, the global correction will tender many opportunities at home.

“We are seeing some of these quite clearly already. The currency is falling and commodity markets are cooling, raw materials included. Freighting costs are coming off, global inflation pressures are lessening and discounts might well emerge.

“The trick for local firms is to take advantage of, and position around, these trends as best they can, as global demand continues to cool down.”

Four of the five seasonally adjusted main diffusion indices recorded their lowest ever values for a September month. Production (45.5) improved slightly on August, while new orders (48.8) returned to similar levels experienced in July. However, employment (44.7) recorded its lowest ever result for the second month in a row, indicating further cuts in staffing levels in the sector.

Unadjusted activity for September showed a distinct contrast between North and South Island. For the North Island, the Northern region (45.9) remained in contraction for the ninth consecutive month, while the Central region (46.2) remained at similar levels to August. In the South Island, both regions showed recovery for September, with the Canterbury/Westland region (51.6) rebounding from the August result and Otago/Southland (53.9) showing expansion for the first time since May.