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NZ manufacturing rises in June, economists cautious about stronger kiwi

Thursday 14th July 2016

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New Zealand manufacturing activity improved again in June, with all regions expanding, though economists warned a stronger New Zealand dollar could weigh on the sector's export earnings.

The BNZ-BusinessNZ performance of manufacturing index rose to a seasonally adjusted 57.7 last month from 57.2 in May. A reading of 50 separates expansion from contraction and the long-term average is 53.1.

The manufacturing sector has been expanding nearly every month since October 2012 and has held above its long-term average for the past 12 months. Bank of New Zealand senior economist Craig Ebert said the PMI had taken the UK's vote to leave the European Union in its stride, with local issues such as building activity and mild winter weather important in the responses to the latest survey.

"While we are obviously encouraged by June’s (post-Brexit) PMI we are also conscious of the soaring currency," Ebert said. "Good economic news comes with a price in FX markets. New Zealand’s trade-weighted exchange rate, at 78, is around 4 percent higher than it was a month ago and 7 percent stronger than it was two months ago. The stronger NZ currency may come to temper enthusiasm in the local manufacturing sector - something we’ll watch for."

Exporters typically favour a weaker currency because it makes their products cheaper for foreign buyers. The kiwi recently traded at 72.78 US cents and the trade-weighted index was at 77.66. 

Four of the five sub-indices measured in the PMI rose in June. New orders rose to 61.6 from 60.1, deliveries advanced to 56.2 from 55.3, and finished stocks moved to an expansionary reading of 50.9 from 49.4.

Employment increased to 53.5 from 53.1, while production dipped to 60.8 from 61.2. Ebert said production had "remained on a real roll, while new orders told of very strong demand down the chain."

Ebert said the construction sector was becoming a driver of manufacturing activity in New Zealand, but there are capacity constraints coming into play in both building and manufacturing, with manufacturers who responded to the NZIER’s Quarterly Survey of Business Opinion for June saying it was increasingly difficult to find staff.

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