NZ manufacturing slumps as global deflation pressures build

New Zealand's manufacturing sector experienced its longest ever recorded period of contraction in the eight months to the end of October, the BNZ-Business NZ Performance of Manufacturing Index (PMI) shows. The unadjusted October PMI value of 47.1 mirrored those of developed and developing economies around the world, raising the prospects of global deflation, BNZ said. The record slump in manufacturing adds to news of falling retail sales for September and reinforces the pressure on the Reserve Bank to cut the Official Cash Rate by as much as 75-100 basis points to 5.5-5.75% on December 4. This will make shorter term fixed rate mortgages more attractive for homeowners and will encourage term deposit investors to lock in high rates while they can. October's PMI indicates that more stocks are sitting on shelves and that there is going to be less output in coming months. Input costs for manufacturers have fallen, and these are likely to be further passed on to commodity prices. "Looking at the detail of the global PMI reveals insights into the state of the manufacturing sector on a global scale "“ and, by and large, it's not pretty," BNZ Markets economist Mark Walton said. "All of the activity-based sub-indexes (i.e. output, new orders and employment) underlying the headline index worsened, in October, with further declines possible," he said. The 'new orders' category of the PMI contracted further in October to 46.3, indicating further declines in the manufacturing sector are increasingly possible in coming months. Globally, 'new orders' reached an all time low. "One of the worst performing sub-indexes underlying October's headline global PMI result was that for forward (or new) orders. The global new orders sub-index plunged to 36.2 (from September's 41.4) "“ mirroring the fall in New Zealand new orders for October "“ to reach an all-time low. Again, India was the only country to exhibit any growth in its new orders. In stark contrast, new orders in the US fell to levels last seen in 1980," Walton said. In New Zealand, the highlight of October's PMI was the Canterbury and Otago regions experienced expansion in their manufacturing sectors, with values of 54.3 and 54.2 respectively. The Northern region has been in contraction for the entire year, with the October value of 43.7 its second lowest PMI value in 2008. The Central region also continued to contract (47.0). Of the four measures of the manufacturing sector, only 'finished stocks' indicated a slight expansion of 50.9 in October. 'Employment' was 44.7, and 'production' 47.5.