Manufacturing growth and optimism lead economic recovery

Thursday 15th July 2010

Manufacturing activity expanded in June, and optimism in the sector indicates that continuing growth can be expected as the New Zealand economy rebalances towards production and saving.

Last month, the BNZ-Business NZ performance of manufacturing index picked up 2.2 points to 56.2 from May to remain firmly entrenched in expansion mode for the tenth consecutive month.

A PMI reading above 50 indicates manufacturing activity is expanding, while below 50 indicates it is contracting. Manufacturing is displaying more than twice the pace of growth in the economy overall, according to BNZ head of research Stephen Toplis.

“Of course, manufacturing, both at home and globally, was hit very hard by recession as big ticket durable purchases were delayed or cancelled by consumers and businesses alike,” Toplis said.

“So to keep the current positive signs in perspective, the recent growth has been off that depressed base.”

There is a sense of growth reorientation going on within the economy toward the manufacturing and primary sectors, and the latest GDP annual growth figures clearly show this, Toplis said.

“Latest data show a clear shift in the economy towards production and saving (or less dis-saving) and away from spending and consumption,” Toplis said.

“The stunning reduction in the nation’s current account deficit from 8% of GDP a year ago to below 3% now is testimony to this.”

All five of the indices making up the PMI were in expansion. Employment went from contraction in May to 52.4, recording its highest result since Nov. 2007. Production lifted 1.2 to 56.2 after a drop in May, as did new orders at 58.0. Finished stocks recorded its highest value since Oct. 2007 at 54.7, while deliveries at 56.6 experienced its second consecutive dip in expansion.

Across the regions Otago/Southland at 58.4 led the charge, and was largely unchanged since May. The Northern region’s 51.6 recovered from a small decline the previous month, and Canterbury at 53.4 and Central at 53.8 displayed similar results.

Manufacturing industry sub-groups were a mix of expansion and slight decline during June, with the strongest growth in machinery and equipment manufacturing at 57.1 and food, beverage and tobacco at 54.9.

The other main categories of petroleum, coal, chemical and associated product at 49.9 and metal product manufacturing at 48.8 were all on the cusp of no change during the month.

Internationally, the JPMorgan PMI for June showed a further easing of activity after its record high-point in April to stand at 55. Australia’s PMI of 52.9 experienced a softening, and the USA PMI’s 56.2 returned to levels seen in February.

“Encouragingly, more manufacturing growth seems to be around the corner judging by the general sentiment in the sector,” Toplis said.

“In fact, manufacturers’ confidence over the past year suggests that the sector is in something of a sweet spot, though perhaps that is in a relative sense given the pessimism that prevailed over most of the previous decade.”

Manufacturers’ optimism is based on the improving world economy, despite the many risks that remain. Part of this is due to strong Asian growth, and by association, Australia, Toplis said.

“Throw in a reasonable NZD/AUD cross exchange rate and trading conditions in a major manufacturing export market have improved markedly,” he said.

Businesswire.co.nz

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