Manufacturing activity weakens for a third month in May

New Zealand manufacturing activity declined for a third straight month in May, while remaining in expansion, as production slipped into contraction.

The BNZ-BusinessNZ performance of manufacturing index fell to a seasonally adjusted 51.5 from 51.7 in April. The weakest component was production, which dipped to 48.4 from 51.8 in April, and below the 50 level which signals expansion.

The performance of manufacturing index has been in expansion for 32 consecutive months. However, New Zealand's economy is starting to slow as weaker global demand dents prices for the country's main commodity exports. In May, manufacturing weakness was led by the forestry, oil and coal categories.

"New Zealand's performance of manufacturing index failed to spark back up in May," Bank of New Zealand senior economist Craig Ebert said. "Whatever is slowing New Zealand's manufacturing production, the sector has at least had some relief in the form of a weakening currency of late. The weaker New Zealand dollar might be something to support the PMI readings over the coming months."

The New Zealand dollar slipped below 70USc last night for the first time in almost five years after the Reserve Bank yesterday cut the benchmark interest rate by a quarter point to 3.25% and signalled more reductions were likely. BNZ expects the local currency to fall to 68USc by the end of the year and to 66USc by the end of 2016. It recently traded at 70.16USc.

Production was the only main diffusion index that fell in May. Of the other indices that make up the PMI, employment expanded to 51.3 from 51.2, new orders gained to 51.4 from 50.3 and finished stocks advanced to 55.3 from 52.9 while deliveries increased to 52.2 from 52.

By region, Otago was the weakest, increasing to 47.5 from 41.9 on an unadjusted basis. Canterbury gained to 55.5 from 54.7, the Central region advanced to 56.4 from 41.9, while the Northern region rose to 51 from 48.4.

The proportion of negative comments increased to 47.3% in May from 43% in April.

"Comments in May were along similar lines to last month in terms of the high value of the New Zealand dollar relative to the Australian, as well as the lacklustre Australian economy," BusinessNZ's executive director for manufacturing Catherine Beard said. "In addition, a number of respondents mentioned the lower dairy payout causing a decrease in new orders."

Dairy companies have pulled back their expectations for milk prices as they face an oversupply in global markets following Russia's ban on dairy imports, the removal of dairy quotas in Europe, and low demand in China.

Synlait Milk this week followed the lead of larger rival Fonterra Cooperative Group, the world's largest dairy exporter, in lowering its payout for the current season and setting a below-average payout for the upcoming season.

(BusinessDesk)