November nosedive for manufacturing activity

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Local manufacturing activity has plunged to another record low, according to the Bank of New Zealand - Business NZ Performance of Manufacturing Index (PMI).

The seasonally adjusted PMI for November stood at 35.4. This was 7.9 points down from October and a significant 21.4 points below the level in November last year. The latest result was also the seventh consecutive month in which the sector has been in decline.

A PMI reading above 50 indicates that manufacturing is generally expanding; below 50 that it is declining. PMI values for November in the years 2002-2007 ranged from 44.3 and 57.9, with an average score for the previous November results of 54.5.

Business NZ chief executive Phil O’Reilly said the global manufacturing depression had well and truly hit New Zealand shores and with the global PMI currently standing at 36.4, New Zealand was in good company with other developed economies.

With production at rock bottom, the ongoing fall in new orders would create further problems for overall activity in the months ahead, said Mr O’Reilly.

“Any sign of a sizeable lift in activity is against the odds in the coming months. The very poor November result also begs the question -- just low will overall activity fall? There’s no clear indication we have yet reached the lowest point for this cycle.”

While it was difficult to spot the positives, Mr O’Reilly said it was hoped New Zealand’s falling exchange rate would provide some competitive boost for those still attaining work on the international market. Recent interest rate cuts may also provide cost of borrowing relief in some quarters – if lines to credit were still available.

“It’s tough going for many manufacturers at present, but we should also be mindful of those who are still finding positives in the market and increasing sales by establishing new markets and diversifying their product range.”

Bank of New Zealand Head of Research Stephen Toplis endorsed these views.

"Manufacturers are being battered on all fronts at the moment. First, they were beaten up by the rapid softening in domestic demand, led by the housing market correction. Now they’re also suffering from phase two of the recession, which involves a drop in demand for export product as recession grips the developed world.

“We remain hopeful that 2010 will be a much better year, as the combined impact of substantial monetary and fiscal easing eventually pushes the economy ahead but for many, between now and then will simply be a fight for survival."

All five seasonally adjusted main diffusion indices were in contraction, as well as four recording their lowest ever results. Production (29.3) experienced a significant fall to post its first sub-30 result, while employment (39.9) dropped back to just under 40. New orders (35.0) dived during November while deliveries of raw materials (37.2) experienced its third consecutive fall. Finished stocks (47.3) remained largely unchanged from October, although still in contraction.

Unadjusted activity for November showed weakness in activity was spread through most of the country. For the North Island, the Northern region (41.6) produced it lowest ever result, while the Central region (43.8) slid down from October’s result. In the South Island, the Canterbury/Westland region (43.4) dropped to its second lowest result recorded (the lowest being June 2008). The Otago/Southland region (51.6) bucked the trend somewhat with another month of expansion, although this was still down on October’s result.