New Zealand's manufacturing activity worsened further in July, dropping for the third month in a row and marking its second consecutive month below its long-run average.

The BNZ-BusinessNZ performance of manufacturing index (PMI) fell to a seasonally adjusted 51.2 in July from 52.8 in June. A reading above 50 separates expanding activity from contraction. The measure outperformed in 2017, averaging 56.2, above the long-term average of 53.8 going back to August 2002.

Among the sub-indices, PMI production turned negative, dropping to 49 from 51.8 in June, and new orders fell to 52.6 from 57.1. Employment rose to 51.2 from 49, finished stocks advanced to 53.6 from 50.2, and deliveries increased to 54.5 from 51.3.

"Being a survey of actual activity - not confidence or expectations - the PMI results through June and July are not a good look for overall economic growth," said Bank of New Zealand senior economist Craig Ebert.


"At this level, the PMI is hinting at more than just a slowdown in the manufacturing sector but outright slow growth. NZ's PMI has slowed to be near the bottom of comparator indicators offshore, from near the top a year ago."

Business confidence has become a political hot potato with surveys like the ANZ business outlook reporting confidence at a 10-year low las month and even the Treasury saying "weaker confidence, in conjunction with other data, highlight the risk that growth over the coming fiscal year may be weaker-than-forecast", in its latest monthly update.

Ebert said the production index turning negative, indicating output contracted in the month, was the most disturbing finding, and that combined with inventory rising "suggests demand softened".

He said if the PMI production index stayed below 50, it would point to a contraction in manufacturing GDP in the third quarter, which "would make it difficult for overall GDP to pick up in the manner that many, including us, currently forecast on the back of a large fiscal stimulus".

While the PMI production index dipped in January last year, only to bounce back, "right now, it is fair to say growth forecasts for the second half of 2018 are on notice."