NZ's manufacturing sector could be stronger than thought, indicating positive GDP growth for Q3, BNZ says

New Zealand's manufacturing sector could be doing better that thought, meaning positive GDP growth in the third quarter was more likely, BNZ economist Craig Ebert said.

The Business NZ-BNZ Performance of Manufacturing Index (PMI) rose in November to 52.7 from 50 in October, suggesting expantion of activity after two months of contraction in September and August.

Despite the weakness in September and August, which was highlighted by the National Bank's recent Quarterly Survey of Business Opinion (QSBO), Ebert said the PMI was one factor suggesting manufacturing was "hanging in there better than the quarterly manufacturing survey seems to indicate".

The headline QSBO survey results had been by far the biggest reason for BNZ revising its Q3 GDP estimate down to dead flat, from the 0.5% it had on the board initially, Ebert said..

"We had the impression that Q3 manufacturing would post a bit of a rebound, having fallen so much in the Q2 GDP accounts – something we judged to be accentuated by the 2009/10 late-summer drought and the way this would have hit agricultural processing with a lag," he said.

"The Q3 survey statistics severely questioned our belief of such a bounce-back. Indeed, as mentioned, they pointed to a further decline.

"But is there still a chance that the actual manufacturing results are not all that dreadful in the GDP, thus keeping the overall Q3 result positive? We say this having not had any of the usual warning signals, about a further big drop in manufacturing output through the September quarter (the way we did do early in the recession) and having seen a number of other manufacturing-related statistics that have actually proved to be robust in Q3," Ebert said.

The PMI was one factor suggesting the manufacturing sector had bee hanging in there better than BNZ thought.

"Yes, only just, with the seasonally adjusted PMI having pretty much flat-lined over the July-October period, having reached a strong peak, of 58.2, back in April. However, its readings of late have  been nowhere near the super-contraction levels experience over late-2008 and the first half of 2009," Ebert said.

"Granted, the production component of PMI did slip into the red through the course of the September quarter, but only moderately so. In any case, it has bounced noticeably in November, to 55.4. This, along with a jump in deliveries, to 57.4, has been instrumental in pushing the overall PMI up to 52.7, from October’s survey result of 50.0," he said.

"The latest PMI, readings from other business surveys, and export statistics, thus call into question the degree of slump in manufacturing output that has been suggested by the Q3 manufacturing sales and inventory statistics.

"Statistics NZ will, of course, be publishing its verdict on manufacturing production in next Thursday’s Q3 GDP.  It promises to be the swinger on the overall result, with the rest of the GDP components, as a whole, offering no clear directional signal," Ebert said.

GDP figures for the September quarter are due on December 23.

(Update includes chart, further comments)