Manufacturing weakens for fifth month

Thursday 16th October 2008

New Zealand manufacturing activity fell in September, extending its contraction to a fifth month on declining orders and lower production in an economy at risk of extending its recession through 2008.

Manufacturing rose to 47 in September, seasonally adjusted, from 45.7 in August, according to the Bank of New Zealand-Business NZ Performance of Manufacturing Index. A reading below 50 indicates a contraction.

The figures come amid rising concern that the US economy will tip into recession this quarter and demand will slow worldwide. The central bank has embarked on its steepest easing cycle since 2001 to revive growth, betting that the slowdown will help reduce inflation that may have peaked at 5.1% in the third quarter.

"The world economy is giving up the ghost of its inflationary past," said Craig Ebert, senior markets economist at Bank of New Zealand. "That has to be bad news for a local economy already well in the grip of recession."

The central bank will cut the official cash rate 100 basis points to 6.5% next week, according to the consensus on estimates compiled by Reuters. The rates decision is due October 23, three days after the Statistics Department releases third-quarter inflation figures that are forecast to show an annual rate of 5.1%.

The central bank is required to keep inflation, on average, at between 1% and 3%.

The PMI diffusion index for production was at 45.5 last month and new orders were at 48.8. Employment was at 44.7, a record low, suggesting manufacturers will extend job cuts. Finished stocks was little changed at 50.2 and deliveries of raw materials was at 48.8

A regional breakdown shows the North Island has been hit hardest, with the northern region at 45.9, the ninth monthly contraction, and the central region at 46.2. In the South Island, the Canterbury/Westland was at 51.6 and Otago/Southland was 53.9.

By Jonathan Underhill

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