South's manufacturing activity slips into contraction

Manufacturing activity in Otago and Southland has slipped into contraction territory but Otago-Southland Employers Association chief executive John Scandrett has found a small portion of comfort from history.

The May BNZ-BusinessNZ performance in manufacturing index (PMI) showed the Otago-Southland reading at 48.1, by far the lowest of the four regions surveyed. The national seasonally-adjusted reading was 52.7, northern was 57.4, central was 56.4 and Canterbury-Westland was 56.7.

The New Zealand figure was an 18-month low but still remained in positive territory. Above 50 means expansion and below 50 contraction.

''Although we were happy at the time to see our March and April regional PMIs remaining in expansion, there were signs then sector activity was slowing.

''With the May result at 48.1 points, we have had to recognise we've now actually slipped marginally into contraction mode. While this is disappointing, we can probably take a small portion of comfort it is the first time it has occurred since April 2013,'' Mr Scandrett said.

The usually solid food and beverage planks of the local manufacturing platform had seen negative activity, largely due to some seasonal factors and the currency challenges placing pressure on the normally buoyant sub-sector sentiment.

On the bright side, textile and clothing performance did not appear to have experienced May slippage and a local boat manufacturer had reported positive outcomes from participation in a recent Auckland marine products exhibition, he said.

Within the May sub-indices, production and new orders were tracking at a relatively slow pace and consistent with the survey sentiment overall.

''There's a clear build on finished inventory levels,'' Mr Scandrett said.

BNZ senior economist Craig Ebert said the slowdown in April's PMI was put down to volatility and the likelihood of trading-day impacts.

The further moderation registered in May - down to an 18-month low of 52.7 - came as a surprise.

''While we wouldn't describe it as concerning, it is certainly something to note.''

Large chunks of the PMI remained encouraging. The production index stayed stout and the employment index held up well.

While some weakness did appear in Otago during the months, and the industries of printing, publishing and recording, along with non-metallic mineral product manufacture, there did not seem to be a pervasive weakness creeping in across industry type, firm size or by way of region, he said.

''Not so encouraging has been the interplay between falling new orders and rising inventory which has us wondering about the extent of growth we can reasonably expect in the pipeline.''

The slower tone of the PMI suggested economic growth of 4% for the year ended June, slowing to 3.4% next year, Mr Ebert said.

There were sill some big economic forces acting to propel the New Zealand economy forward. While the further slow down in May's PMI warranted attention, many factors remained promising to underpin the local manufacturing sector over the coming year or two, he said.

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