Dairy, meat processing boost manufacturing output, but price falls cut revenues (Update 1)

New Zealand manufacturers increased activity in the June quarter, but falls in prices meant that the value of their increased sales fell over the quarter, figures released by Statistics New Zealand (Stats NZ) show. Higher quantities of meat and dairy product manufacturing kept volumes up over the quarter, but lower prices for these products led the fall in the value of sales. (Update 1 includes ASB economist comment on improved Q2 GDP expectations.) Seasonally adjusted figures show the total volume of manufacturing sales rose 1.8% in the June quarter from the March quarter, but price falls meant the value of these sales fell 4.8%. Unadjusted figures show the value of manufacturing sales were down 5.1% from a year ago, following increases of 0.5% in March and 3.4% in September. The previous June quarter saw 9% year-on-year growth. These figures are watched closely for an indication of June quarter GDP. Most economists had expected a decline in both volumes and sales. Most economists expect the June quarter to show New Zealand's sixth consecutive quarter of recession. "The main contributor to the latest rise (in volumes) was the meat and dairy product manufacturing industry, which rose 7.4 percent in sales volume," Stats NZ said. "Excluding meat and dairy product manufacturing, the total sales volume would show a fall of 2.8 percent. Eight of the 15 industries recorded falls in sales volume for the June 2009 quarter, with the largest falls being for machinery and equipment manufacturing, and non-metallic mineral product manufacturing," it said. "Although the total volume of manufacturing sales rose in the June 2009 quarter, the value fell by 4.8 percent ($986 million). Lower prices for meat and dairy products, resulting in a $633 million drop in the value of meat and dairy product manufacturing, were the main cause of this fall." "The trend for the volume of manufacturing sales is flat for the June 2009 quarter, after five quarters of decline. The trend for the sales value shows a decline for the latest two quarters." Despite the price falls for meat and dairy products, the dairy industry has been buoyed by the recent increase in prices at Fonterra's internet auctions of whole milk powder. Prices jumped 24% in the September auction, on top of a 25% jump in August. ASB economist Jane Turner noted the strength in volumes was stronger than expected.

On balance, this report is stronger than we expected and we have nudged up our forecast for Q2 GDP to be flat (from -0.1% previously). MED energy data, due to be released on Thursday will be the final input before we finalise our forecast. Better than expected data so far suggests there is a chance that New Zealand's recession may have ended earlier than previously thought. Nonetheless, demand remains reasonably subdued and GDP output is likely to remain fairly flat over the next few quarters.