Lower dollar gets manufacturing moving

The manufacturing sector has shifted out of reverse gear, the Business New Zealand performance of manufacturing index shows.

The PMI rose 2.3 points to 53.5 last month and any figure above 50 indicates activity in the sector is expanding.

The index had just nudged back into the black in February after five straight months in the contraction zone.

"We think that it is pretty much driven by the dollar," said Business NZ chief executive Phil O'Reilly.

The dollar has fallen from more than US70c in mid-January to US61.5c yesterday.

Of the respondent firms which mentioned the dollar, about 60 per cent saw its recent fall as positive, while 9 per cent saw it as increasing the cost of imported inputs.

O'Reilly said the survey's component indicators suggested the recovery would last: New orders, production and deliveries all increased while finished stocks fell.

Employment was flat, after having shrunk for nine of the previous 10 months.

The improvement was recorded across all regions, save the one centred on Wellington. The bellwether region, Canterbury, did better than average.

The improvement in the index comes on the heels of Tuesday's quarterly survey of business opinion by the Institute of Economic Research, which found sentiment among manufacturers still weak by historical standards, but improving.

The survey recorded a strong rebound in the net balance of firms expecting their output to increase over the next 12 months.

While manufacturing firms reported a further decline in export sales over the past three months, their expectations of the next three months have improved.

Hiring and investment intentions, though still at historically weak levels, improved as well, despite a continued squeeze on profits.

ANZ National Bank' acting chief economist, Cameron Bagrie, said the lower exchange rate would encourage manufacturers to keep their cheque books open, even though it might be some time before they felt the benefits of the lower dollar in terms of income.

He said the stimulus of a lower currency would work faster than it did in the last big downward move in the late 1990s, because exporters were carrying less hedging and corporate balance sheets and cashflows were stronger, allowing them to invest in anticipation of the income boost to come.