New Zealand's manufacturing activity fell to a five-year low in December as businesses deferred major decisions until there is more clarity after the change in the government, echoing the downbeat sentiment in this week's business confidence survey.

The BusinessNZ-Bank of New Zealand performance of manufacturing index fell 6.5 points to a seasonally adjusted 51.2 in December. While it continued its run of expansionary readings above 50 in every month since October 2012, it was the lowest result since December 2012.

Businesses have been jittery since the formation of the Labour-led government as they wait to see what impact new policies will have on things like industrial relations, the labour market and trade as well as the property market.

"Anecdotal evidence, across the economy, suggests there was a post-election hiccup in activity as businesses put off major spending, investment and hiring decisions until there was greater clarity and, more importantly, understanding of likely policy shifts. Today's data are consistent with this hypothesis," said BNZ head of research Stephen Toplis.


All five of the sub-indices fell, with production down 8.4 points to 53.3, employment down 2.8 points to 51.3, finished stocks down 4.8 points to 51.9, deliveries down 8.8 points to 50 and new orders down 7.1 points to 50.2.

Toplis said while he expected a bounce back in activity once political uncertainties diminished, "there are also signs in this data that future production may come under some pressure as the decline in new orders is proving greater than the decline in inventory".

The data mean fourth-quarter gross domestic product might be lower than expected, he said. BNZ was already forecasting a sub-consensus 0.5 per cent increase and "there appears to be increasing downside risk to this pick".

According to Toplis, the data are weaker than their equivalents in the quarterly survey of business opinion published this week by the New Zealand Institute of Economic Research.

A net 16 per cent of manufacturing firms surveyed expected economic conditions to deteriorate in the first half of this year, versus a positive reading of 12 per cent in the prior period.

Regarding output, however, 25 per cent said they experienced an increase in the past quarter, up from 12 per cent in the September quarter and a net 18 per cent said they expected an increase in the next quarter.