Manufacturing sector surges in March to best since 2007

The BNZ - Business NZ survey of the manufacturing sector found it expanded at its fastest rate in March since November 2007, driven by strong demand from Australia and restocking. The seasonally adjusted Performance of Manufacturing Index (PMI) improved to 56.3 in March from 53.6 in February. This was its highest level since 56.4 in November 2007 at the beginning of the recession. This is another piece of the economic jigsaw suggesting a recovery is bedding down, raising the question again about when the Reserve Bank will hike the Official Cash Rate from its current 2.5% record low. Most economists are forecasting the first hike on either June 10 or July 29, with the third chance being July 16. The next RBNZ decision is on April 29. Here is our interactive chart. Here is more detailed results from the survey and comments from BNZ's economists.

New Zealand’s manufacturing sector took another significant step forward in March. This extends progress out of the deep hole that the sector was in through 2008 and 2009. Indeed, March was the seventh consecutive month of expansion. Encouragingly, the trend recovery that has been underway since mid-to-late last year appears to have accelerated. In lifting to a seasonally adjusted 56.3 in March, from 53.6 in February, the Performance of Manufacturing Index has hit its highest level since late 2007. First, the starting point. Not exactly a driver of growth, but the low base does allow for fast gains. The manufacturing sector was one of the hardest hit by the global and domestic recession. And even though the sector was by far the biggest positive contributor to overall GDP growth in Q4, keep in mind that, even after this expansion, the level of manufacturing activity is still more than 16% below its previous peak back in 2005. The improving signs should be seen in the context of still making up for lost ground. Second, Australia. The recent strength of the Australian economy has been a boon to many kiwi manufacturers. Not only did Australia not have a recession during the global crisis, the prospects have improved such that the Reserve Bank of Australia has hiked interest rates five times since last October. The relative strength of the Australian economy and higher interest rates have seen the Australian dollar well bid, including against the NZ dollar. This provides a win-win for NZ manufacturers supplying the Australian market. Not only have Australian incomes lifted with economic growth, but the stronger Australian currency boosts the purchasing power of those incomes in New Zealand. Or put another way, higher incomes breed an expanding market and the lower NZ dollar helps make kiwi products more competitive against their Australian equivalents. Certainly, the NZ dollar well below 80c against its Australian counterpart is encouraging and has no doubt played a part in the recent improvement in export sales reported by manufacturers in the Quarterly Survey of Business Opinion. A net 16% of manufacturers reported higher export sales in Q1, a better-than-average result (far better than the net 9% that reported a drop in domestic sales over the period). Moreover, a net 23% expected to increase exports over the coming quarter. This is clearly positive, but we are also conscious of the fact that the longer the China-driven commodity boom lasts and the more Australian resources that are assigned to it, the more vulnerable we become to a correction. This is not to take the gloss of the current improvement, nor a forecast that we think the commodity boom will correct, it is merely a note of the risks associated with increasing dependence on effectively one market. Third, re-stocking. Higher production is also destined to boost inventory, judging by the more than 5 point rise in the finished stocks index over the past two months. No wonder given the marked rundown over recent times. However, we do question how long this restocking can last. New orders remained robust in March and firmly in expansion territory. But we note that the production index has now caught up and passed new orders. This is all good for faster trend growth in the short term, but suggests growth may ease off a tad beyond the restocking phase of recovery. All five seasonally adjusted main diffusion indices remained in expansion – the first consecutive expansion across all main indices since the end of 2007. Production (59.4) was the highest value, with levels not seen since August 2007. New orders (56.9) remained healthy, with the last five values for the index within a tight band. Employment (50.1) slipped from February to show almost no change, while finished stocks (52.8) were in positive territory for the second consecutive time after a prolonged period in contraction. Deliveries (57.0) rose 3.4 points to stand at its highest result since October 2007. Unadjusted results by region showed most in expansion during March. This was again led by the Canterbury region (58.6), which experienced a slight dip from February. Both the Northern (57.8) and Otago/Southland (57.5) regions experienced similar levels of expansion, with both at their highest level since November 2009. While the Central region (49.0) remains in contraction, the March result was an improvement on February. Manufacturing by industry sub-groups was almost all in expansion for March. The categories experiencing the strongest expansion included metal product manufacturing (62.4) and machinery & equipment manufacturing (58.1), with both building on activity levels from February. The petroleum, coal, chemical & associated product sector (50.5) also showed further improvement from the previous month, pulling itself out of contraction. Comparing New Zealand’s manufacturing activity with the rest of the world, the JPMorgan Global PMI for March (56.7) faired even better, with a 70- month high. This was due to production and new orders picking up pace globally. The USA PMI (59.6) was the highest since July 2004, while the Australian PMI (50.2) eased back from the February result. � The proportion of negative comments made by respondents took a significant dive to 43%, compared with 66% in February. Positive comments focused strongly on increased domestic and offshore demand.