Manufacturing activity slows as dairy woes bite

New Zealand's manufacturing activity expanded at a slower pace in July as a downturn in the dairy sector started to weigh on industrial production, despite the support a weaker kiwi dollar offers exporters.

The BNZ-BusinessNZ performance of manufacturing index fell to 53.5 last month from 55.1 in June, and was down from 54.1 a year earlier. A reading of 50 separates expansion from contraction.

Trends in the sub-sectors of the index showed growth in inventories of finished stock while new orders and employment indices slipped sharply.

Manufacturers told the survey the New Zealand dollar's devaluation had been a boon as it increased the value of sales into foreign markets, though a slump in global dairy prices and the subsequent belt-tightening facing farmers was a negative.

The manufacturing sector's activity has been growing for 34 consecutive months.

"The extreme downturn in dairy revenue, actual and forecast, will have many downstream effects on the economy," Bank of New Zealand senior economist Doug Steel says.

"Many manufacturers noted the dairy weakness as a negative. No doubt there will be a drag from dairy."

The fall in dairy prices has prompted some economists to revise down their expectations for economic growth in the coming year, and its impact on the country's terms of trade prompted the central bank to start cutting interest rates in June.

Still, increased tourism numbers, and the pipeline of construction work, which is closely linked to manufacturing activity, in Canterbury and Auckland are expected to keep gross domestic product expanding.

The PMI showed finished stocks was the only sub-index to accelerate expansion in the month, rising to 51.7 from 51.1 in June. Production slowed to a rate of 55.9 from 56.1, employment declined to 50.8 from 53.8, new orders slowed to 54.4 from 58 and deliveries dropped to 53.5 from 55.

Across the regions, activity in Otago shrank for a fourth month with a reading of 49.8.

The rest of the country was in expansion, with Northern posting a reading of 52.5, Central reporting 50.9, and Canterbury at 56.3.

(BusinessDesk)