Manufacturing activity falls sharply in December as firms await clarity

All five of the sub-indices fell.

New Zealand's manufacturing activity fell a five-year low in December as businesses deferred major decisions until there is more clarity after the change in the government, echoing the downbeat sentiment in this week's business confidence survey.

The BusinessNZ-Bank of New Zealand performance of manufacturing index fell 6.5 points to a seasonally adjusted 51.2 in December. While it continued its run of expansionary readings above 50 in every month since October 2012, it was the lowest result since December 2012.

Businesses have been jittery since the formation of the Labour-led government as they wait to see what impact new policies will have on things like industrial relations, the labour market and trade as well as the property market.

"Anecdotal evidence, across the economy, suggests there was a post-election hiccup in activity as businesses put off major spending, investment and hiring decisions until there was greater clarity and, more importantly, understanding of likely policy shifts. Today's data are consistent with this hypothesis," said BNZ head of research Stephen Toplis.

The New Zealand dollar fell to 72.87 US cents from 73.04 cents immediately before the release but has since recouped that dip recently trading at 72.97 cents.

All five of the sub-indices fell, with production down 8.4 points to 53.3, employment down 2.8 points to 51.3, finished stocks down 4.8 points to 51.9, deliveries down 8.8 points to 50 and new orders down 7.1 points to 50.2.

Toplis said while he expects a bounce back in activity once political uncertainties diminish, "there are also signs in this data that future production may come under some pressure as the decline in new orders is proving greater than the decline in inventory".

The data mean fourth-quarter gross domestic product might be lower than expected, he said. BNZ was already forecasting a sub-consensus 0.5 percent increase and "there appears to be increasing downside risk to this pick."

According to Toplis, the data are weaker than their equivalents in the quarterly survey of business opinion published this week by the New Zealand Institute of Economic Research. A net 16 percent of manufacturing firms surveyed expect economic conditions to deteriorate in the first half of this year, versus a positive reading of 12 percent in the prior period. Regarding output, however, 25 percent said they experienced an increase in the past quarter, up from 12 percent in the September quarter and a net 18 percent said they expect an increase in the next quarter.