New Zealand's manufacturing sector slumped back into contraction in April after four months of expansion, the BusinessNZ-BNZ Purchasing Managers Index survey shows.
BNZ cited the high New Zealand dollar for the surprise slide.
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BusinessNZ’s executive director for manufacturing Catherine Beard said that after a positive first quarter to the year, the fall back in April was disappointing from the perspective of getting the sector back on track.
BNZ economists remarked “April’s PMI result was a significant dip. Equally though, just like we were reluctant to buy into the extreme strength in February as an indicator of rapid trend expansion, we are wary of taking April’s result as a signal of a new downtrend. The truth about the trend probably lies somewhere in the middle. It is encouraging that manufacturers, on net, are adding to staff levels.”
The PMI has been on a rollercoaster over the past few months. From a low of 45.8 in November last year, it then roared higher to a peak of 57.8 in February, only to sharply unwind to 48.0 by April.
What to make of that?! If nothing else, this suggests it has been a challenging environment for the manufacturing sector. Even if the trend has been mildly positive over recent months, as it has been, it highlights the more-than-usual month-to-month volatility in performance. Planning can only be more difficult with such choppiness.
This goes for monitoring and forecasting as much as planning. In such circumstance, it is worth keeping an eye on the trends as best as one can. In this regard, one trend indicator, the three month average, sits at 53.2. This indicates some underlying positive momentum, even if it has faded a point from last month.
This is not to deny the weakness in the April PMI result itself. The rollercoaster clearly dipped in the month. Not only was the drop to 48.0 from March’s 53.8 significant in the historical context of the near 10-year history of the survey, but the dip was driven by the important subcomponents of production and new orders. Moreover, the downshift was relatively pervasive across industries, regions and firm size (although the recent trend of large firms outperforming smaller firms has continued). On this basis it would be unwise to dismiss the result as simply noise.
Equally though, just like we were reluctant to buy into the extreme strength in February as an indicator of rapid trend expansion we are wary of taking a small dip below the 50 mark as the harbinger of a new downtrend. The truth probably lies somewhere in the middle. In fact, because of the extreme strength in February, the dip in April does not come as an entire surprise. For now, we stick with the view that the manufacturing sector is on a mildly positive trend.
The PMI employment index supports this view, holding up relatively well at 51.2 in April. Sure, it was down a point from March but it remains a point above the breakeven 50 mark. Manufacturers seemed confident enough to make net additions to the payroll in April, despite a dip in production and new orders. This follows last week’s Household Labour Force Survey that showed manufacturing employment grew 2%, or 5,000 people, in the year to March 2012. Not strong growth for sure, and it is still coming off a low base, but supporting evidence of some underlying improvement along the likes of what the PMI has been foretelling for some time.
So what caused the dip in the April PMI production and new orders? It is impossible to know for sure. There are plenty of potential candidates: the strong currency; the ongoing uncertainty and confusion around the European debt situation and outlook for world growth and thus export demand; a slowdown in parts of Australia; higher wholesale spot electricity prices; reduced livestock processing as feed (grass) conditions allow farmers to hold onto stock for longer than usual; just to name a few. Such things certainly got mentioned in respondent comments to varying degrees.
To the extent that at least part of the April PMI dip can be sheeted back to the NZ dollar, either through its general persistent strength or the important NZD/AUD crossrate for manufacturers hitting a seven month high in April, there is some prospect of a PMI reversal in coming months. Following the April survey period, and at the time of writing, the NZD has pulled back more than 3% on a TWI basis. No doubt exporters and those competing with imports would like to see more than the few cents the NZD has shed to date, but at least it is providing some relaxation in financial conditions.
The currency’s pullback is important at a macro economic level as it is to the manufacturing sector specifically. After all, in April the RBNZ singled-out future sustained currency strength as a potential catalyst for reassessing the monetary policy outlook. The pullback in the currency over the past week or so has delivered significant relief relative to where the RBNZ had it pegged for the second quarter of the year. This should not be lost on an interest rate market that is on the hunt for an OCR cut.
What the RBNZ eventually decides to do with the OCR will depend on all factors. As a part of this, we will be on the lookout to see if the dip in April’s PMI is precursor to a softening in other business surveys, across a wider range of sectors. It need not necessarily be so. It will be interesting to see where the likes of the upcoming PSI and NBBO get to. For us, some of these surveys could drop a fair way before really threatening the ongoing economic recovery story, in our view. As we learn from rollercoaster rides, the best thing is to hang on in there.