Record fall in manufacturing

The country's ailing economic health has been illustrated by the release of worrying data about the state of the manufacturing sector today.

The volume of manufacturing sales fell by a seasonally adjusted record 5.4 per cent in the December quarter, compared to the previous three months, Statistics New Zealand (SNZ) said.

It was the fourth consecutive quarterly fall and the largest since the series started in 1994, with the series now at its lowest level since March 2002, SNZ said.

Volatility in the series had increased in recent quarters.

Among industries surveyed, the largest fall was in meat and dairy product manufacturing, which was down 6 per cent, followed by a 30 per cent fall in petroleum and industrial chemical manufacturing, and a 28 per cent fall in basic metal manufacturing.

Minor increases in sales volumes happened in three published industries in the December quarter, with the largest being a 0.9 per cent rise in machinery and equipment manufacturing, SNZ said.

Although the volume of sales was down, increased prices for dairy products, fertilisers and chemicals, and transport equipment helped keep the overall sales value flat in the December quarter.

Meat and dairy product manufacturing had the largest increase, up $326 million, but that was offset by falls in other industries, particularly basis metal manufacturing which fell by $203m.

When meat and dairy product manufacturing was excluded, the volume of sales fell 5.1 per cent in the December quarter, following a fall of 3.5 per cent in the September quarter.

The value of sales fell 1.2 per cent, or $178m, when meat and dairy product manufacturing was excluded, after having been flat in the September quarter.

Robin Clements, senior economist with UBS (NZ), said the disappointing data has led to his bank trimming its NZ growth forecasts for the year ahead.

"With the BNZ Capital-Business NZ Performance of Manufacturing Index suggesting no let-up in the contractionary pressure facing the manufacturing sector in Q1, and the already recognised likelihood of another sizeable drag from housing, we have revised our Q1 real GDP forecast from a contraction of 0.2 per cent to minus 0.5 per cent.

Recent downgrades to Australian GDP forecasts were another contributing factor, he said.

Clements said his team's medium-term forecasts were considerably more downbeat than those of the Reserve Bank.

"The RBNZ has economic momentum rebounding from -2.2 per cent for March 2009 (we have -2.1 per cent), to +3.2 per cent by March 2010 (we have +0.3 per cent).

"However, the RBNZ may decide not to cut rates even further. The Bank may well still feel it is doing enough, even if the recovery turns out to be weaker than they expect.

"That said, unless we some signs soon of the economy stabilising, then there is a rising risk that the OCR trough will be as low as 2.0 per cent, not our currently predicted 2.5 per cent low.

"We still look for the RBNZ to lower the OCR by 50 basis points to 2.5 per cent at the end of next month", said Clements.

- NZPA, agencies