Manufacturing expands for 19th month

The lift in the manufacturing index is no one-month wonder but the continuation of a strengthening trend, says an economist. Photo / Brett Phibbs

New Zealand's "buoyant" manufacturing sector expanded for the 19th consecutive month in March as domestic demand for goods and fast-growing Asian economies fuelled economic momentum through the first quarter of 2014. The employment index reached a seven-year high.

The BNZ-BusinessNZ seasonally adjusted performance of manufacturing index increased to 58.4 in March, from an upwardly revised 56.5 in February, and 53 in March last year. A reading above 50 indicates expansion in the sector.

The PMI averaged 57.1 in the first quarter of 2014 with the manufacturing sector in a "buoyant mood" making the most of strong domestic demand and increased exposure to fast growing Asian economies while negotiating a high kiwi dollar and global uncertainty, BNZ said. But the Reserve Bank's tightening of monetary conditions to stem any inflationary pressure means borrowers must manage risk around their debt, BNZ warned.

"There is every reason to assume that such momentum can be sustained for a while yet, but we caution that the operating environment may change significantly for many" said BNZ head of research Stephen Toplis. "This is not to say that all and sundry should rush out and fix their borrowing rates, as fixed rates are already pricing in a significant increase in the cash rate. But understanding interest rate risk at this juncture is a must."

The central bank kicked off a tightening cycle in March, lifting the official cash rate a quarter-point to 2.75 percent and it anticipates raising the OCR another 2 percentage points over the next two years. Further interest rate hikes are "highly dependent on the combination of the movements in the New Zealand dollar and commodity prices," BNZ's Toplis said.

All five of the seasonally adjusted main diffusion indices in March expanded, for the first time since October, as finished stocks edged up to 51.1. The biggest gainer was employment up 1.6 points to 56.3, its highest level since November 2007, while deliveries of raw material slipped slightly to 57.1.

BNZ's manufacturing index showed broad based expansion across New Zealand, with all four regions above the 50 cut off point. Canterbury/Westland picked up 6.2 points to be the strongest reading of 59.9 while Otago-Southland was the only region to slip after a strong February reading.

Meanwhile, the ANZ Truckometer, which measures economic activity using real time traffic data, showed a monthly decline in the Heavy Traffic Index of 1.1 percent, while the Light Traffic Index lifted 1.1 percent. For the March quarter both indexes rose, indicating economic growth will continue into the middle of the year, ANZ said, but also warned that growth may be crimped by interest rate hikes and the strong kiwi currency.

The last three months of 2013 "may well have been the peak of quarterly growth in the current upswing," said ANZ senior economist Sharon Zollner. "Headwinds will soon start to blow harder. The Reserve Bank is raising interest rates as inflation pressures mount, and debt levels remain high. Fiscal policy is tight. The exchange rate remains at eye-watering levels."

"Prolonging the expansion will require spending restraint on the part of households, and an ongoing focus on productivity growth by firms," said ANZ's Zollner.