New Zealand manufacturing activity finished 2016 above its long-term average, unchanged in December from a month earlier.
The Bank of New Zealand-BusinessNZ performance of manufacturing index was unchanged at a seasonally adjusted 54.5 last month from November, with three of the five sub-indices rising. A reading of 50 separates expansion from contraction, with the long-term average at 53.2. The PMI averaged 56 throughout the year, the second-highest annual average since the survey began in 2002, surpassed only by 2004's average of 57.5.
New Zealand's manufacturing sector had been in an almost continuous expansion since October 2012, barring a blip in January last year when the PMI slipped into contraction with a reading of 49.8. The economy has been buoyed by a construction boom that started in the post-earthquakes Christchurch rebuild and has extended to Auckland's housing market.
The positive sentiment was supported by the latest quarterly survey of business opinion (QSBO) released on Tuesday, with manufacturers more upbeat in the three months to Dec. 31, 2016. However, BNZ economist Doug Steel said a decline in the PMI's new orders sub-index, falling 5.2 points to 52.6, was a warning.
"Sure, it is still indicating growth (being above 50), but it is the lowest level of new orders for nearly two years," Steel said. "This is worth watching as an indicator of sales growth ahead. The industry's new orders also slowed a bit in the QSBO.
"The other potential warning came from large firms where their PMI slumped to 44.9 in December. We reserve judgement on this, as we have seen such moves before, for it to only bounce back the very next month. In all this, we note that December/January data is more difficult to trust as an indicator of trend given the holiday period," Steel said.
The production sub-index fell 0.4 points to 57.6, while employment, the worst performing sub-index in the last survey, gained 2.5 points to 51.6 in December. Finished stocks rose 1.8 points to 51.8 and deliveries gained 1.5 points to 54.6.
Steel said softer new order indicators shouldn't cause too much alarm as manufacturers' overall outlook is upbeat, with a net 23 per cent expecting better economic conditions over the next six months according to the QSBO, well above long-term norms of a net -6 per cent. Manufacturers are also finding it hard to employ appropriate staff with capacity utilisation at 92.3 per cent, above the long-term average of 90.4 per cent.
BNZ expects solid economic growth ahead, with some slowing in the second half of 2017 and into the following year. Steel said it would be important to see whether slower growth if it happens, comes from capacity constraints or weaker demand.