Talk of manufacturing crisis overblown, despite third consecutive monthly contraction in sector, BNZ says; 'Recent weakness turbulence, not tragedy'

By Alex Tarrant

Talk of a manufacturing crisis is overblown, with recent weaknesses likely to be transitory turbulence rather than the start of another downturn, BNZ economists say.

And while a lower exchange rate would help the sector, achieving this via quantitative easing, as mooted this week by the Green Party, would scare away the foreign investors the economy currently relied on.

Anyway, recent surveys suggested manufacturers were "not dying a death under the weight of any export collapse, triggered by the exchange rate, as some would seem to claim," BNZ economist Doug Steel said. Current weakness appeared to be more due to lacklustre domestic conditions rather than external demand.

New Zealand's manufacturing sector remained "stubbornly" in contraction in September for the third consecutive month, according to the latest BNZ-Business NZ Performance of Manufacturing Index (PMI). Including June's 'no change' reading, the sector hasn't expanded for four months in a row.

BNZ's Steel pointed to other recent surveys which indicated the sector held a positive outlook for activity over the coming year. Steel concluded there was "enough positivism emanating from New Zealand’s manufacturing sector to take the signs of recent weakness as more turbulence than tragedy."

The latest snapshot of the sector comes as politicians argue about the state of industry in New Zealand. Opposition MPs claim 40,000 manufacturing jobs have been lost in the last four years, while Prime Minister John Key claims numbers are "slightly increasing." For more on this debate see NZ Herald Political Editor Audrey Young's piece, Facts and figures all add up...sort of.

Still contracting (Yikes)

The PMI didn’t recover as much as hoped in September, Steel said. While its seasonally adjusted level edged up to 48.2, from 47.4 in August [a reading under 50 represents contraction in activity], it was the third month in a row that it was in contraction mode.

"And while its employment index almost stabilised (49.2, from 45.5) its new orders component fell further, to 45.9, from 47.9 in August. This is normally a good leading indicator to a big loss of momentum. Yikes," Steel said. 

"It’s also worth noting that the manufacturing component of Tuesday’s Quarterly Survey of Business Opinion (QSBO from NZIER) was lacklustre, in the same respects. Its output reports for the three months just elapsed, for instance, plunged to -26, from -3. This was about the average degree of negativeness we saw during the recession of 2008/09," he said.

"Manufacturers in the [recent] QSBO likewise reported a big drop in new orders, to a worrisome -20."

But positive outlook (wishful thinking?)

"So how on earth can we not ring the alarm bell? Well, because, crucially, the sector itself is not. Granted, this wasn’t obvious in the latest PMI. But then this survey, by construction, is essentially about current conditions, not so much the way ahead," Steel said.

For the sector's outlook Steel pointed to this week's QSBO, which he said revealed a "reasonably positive sector."

"Its expectations may reflect a bit of wishful thinking, following the rough patch they would seem to be experiencing at present. However, these remained encouraging. For example, as much as their trading reports plunged, manufacturers’ expectations for output over the coming three months lifted to +17, from +9. That’s about the norm," Steel said.

"Expectations for new orders surged to +21, from +4. That’s almost twice the historical average," he said.

Not dying from a NZ$-triggered export collapse

Another nerve-calming factor was that present points of weakness appeared to be more about domestic conditions than external demand.

"Regarding the three months just past, reports on domestic deliveries subsided to -16, while for exports held above the line, at +4. What’s more, expectations of export sales over the coming three month surged to +30, while for domestic deliveries improved to +8," Steel said.

"This suggests manufacturers, as a whole, are not dying a death under the weight of any export collapse, triggered by the exchange rate, as some would seem to claim. And although the domestic sales are lagging we can easily imagine they will be increasingly supported by the upswing in construction that is looking more and more assured," he said.

"Looking further out, we also note that manufacturers in the most recent NBNZ business survey held a fairly solid view of their business for the coming twelve months. Indeed, its own-activity expectations, at +37, were comfortably above their +28 norm. This included an exports outlook of +32. Employment expectations were +6, slightly above average. 

Turbulence not tragedy

"So, all things considered, we can see enough positivism emanating from New Zealand’s manufacturing sector to take the signs of recent weakness as more turbulence than tragedy," Steel said.

"Talk that the industry is in crisis is overblown. And yes, it would probably appreciate a lower exchange rate. But as for trying to achieve this by printing NZ dollars, as some have suggested, this would only succeed to the extent foreign investors take fright at what it might mean for future NZ government economic policy," he said.