The three surveys that we monitor indicate that manufacturing remains in contraction, and that a strong NZ$ is not conducive to business confidence or sentiment, nor manufacturing sales and margins.

The Bank of New Zealand – Business New Zealand Performance of Manufacturing Index (PMI) stood at 42.7 in May, down 1.0 point from April (43.7). This result is an improvement from the 41.9 recorded in March and 39.0 in February, but indicates that manufacturing activity in New Zealand remains in contraction. Note, a PMI reading below 50 indicates manufacturing activity is contracting. 

All five sub-indices measured recorded a contraction, with production (41.4) and employment (43.0) falling on the previous months results. New orders and the delivery of raw materials both fell 0.6 points, while finished stocks reached a new low, slipping 0.6 points to 45.5 in May.

The three-monthly average for the PMI has improved slightly in May to sit at 41.4, up from the 39.7 recorded in April. All three quarterly average indicators have improved, with production showing the strongest result, up 2.8 points. Over the last three months, employment has averaged 42.4, an improvement from previous quarters but well below the three monthly average seen in May 2008 (48.3). However, the last time the three-monthly average for May was above 50, indicating manufacturing activity is expanding, was May 2006 when it stood at 51.1.

Turning to the regions, the unadjusted activity for May was a mixed result. The Central and Otago regions slipped 4.3 and 4.0 points respectively, while the Northern and Canterbury regions saw an improvement in manufacturing activity, with 4.3 and 3.7 point improvements from April figures.
Looking at three-monthly averages, each of the regions recorded a PMI below 50 with Otago (38.1) and the Central region (40.6) recording the lowest results for the quarter. Comparing May quarter results year-on-year, the Otago region has witnessed the largest fall, with a 12.1 point drop.

A decline in manufacturing activity in the regions is supported by the latest New Zealand Manufacturers and Exporters Association (NZMEA) Survey of Business Conditions. This survey was completed during May and shows total sales in April 2009 decreased 59% year-on-year (export sales decreased by 53% while domestic sales were down 62%). The current performance, change, and forecast indices were all down on the previous months’ results and are still indicating contraction. Further, the constraints reported by the businesses surveyed were considered to be 8% capacity and 92% markets.

The Statistics New Zealand Economic Survey of Manufacturing recorded sales volumes (seasonally adjusted) were up a bare 0.2% in the March 2009 quarter, compared to the December 2008 quarter. This is the first positive quarterly figure since the December 2007 quarter. However, this still puts sales volumes for the year to March 2009 some 5.6% down on a year earlier.

Within manufacturing, the 0.2% quarterly growth was helped immensely by a 23% rise in meat and dairy product processing. Outside of this sector, the picture was bleak indeed, with a 6.5% average quarterly fall in all other manufacturing. Particularly, large quarterly falls were registered in wood products (-10.9%) and structural sheet and fabricated metal products (-12.7%), although the large machinery and equipment sector managed a better than average 5.6% fall.

Turning to the world, over the last two months contraction in global manufacturing activity has eased slightly. The JPMorgan Global PMI rose by 3.5 points to sit at 45.3 in May, the best result in nine months.

The overall forecast in the near term is for continued contraction as manufacturing sales drop due to a decline in market demand, and the sector continues to restructure in an attempt to improve margins and profitability.

- Reprinted from BERL Forecasts June 2009