BNZ - BUSINESSNZ PERFORMANCE OF MANUFACTURING INDEX

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1 BNZ - BUSINESSNZ PERFORMANCE OF MANUFACTURING INDEX expanding December Value Monthly Change Slower rate Summer slowdown 19 January 2018 New Zealand s level of manufacturing expansion slowed during December, according to the BNZ - BusinessNZ Performance of Manufacturing Index (PMI). The seasonally adjusted PMI for December was 51.2 (a PMI reading above 50.0 indicates that manufacturing is generally expanding; below 50.0 that it is declining). This was 6.5 points down from the previous month, and the lowest result since December Despite the drop from November, the sector has remained in expansion in all months since October BusinessNZ s executive director for manufacturing Catherine Beard said that while it was disappointing to see the last month of showing a sizeable dip in expansion levels, the wider context of the results needs to be taken into account. Catherine Beard Executive Director ManufacturingNZ While all sub-indexes dropped in December, they all still remain in expansion. Also, the proportion of positive comments in December (63.3%) was very close to the November result (65.1%). Christmas and the general holiday season were mentioned for those who provided both positive and negative comments, along with weather conditions. Overall, we ll be looking to the January result to see if the sector gets back into the level of expansion its been accustomed to in recent times. BNZ Head of Research, Stephen Toplis, said that 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. View PMI Time Series Data

2 Main Indices Regional Results Deliveries 50.0 Production 53.3 Employment Finished Stocks 51.9 New Orders Manufacturing Snapshot Aberration or Warning Sign An aberration or a warning sign of things to come? That s the question on our lips as we look at the data provided in the December Performance of Manufacturing Index (PMI). Read more Widespread Retreat Moreover, all components of the index were in retreat with production levels, new orders and deliveries of raw materials driving the slowdown. Stephen Toplis Head of Research Read more GDP Headed Sub-Consensus As things stand, we are already forecasting a subconsensus 0.5% increase for Q4 economy-wide GDP. There appears to be increasing downside risk to this pick. Read more View full BNZ Manufacturing Snapshot

3 PMI Time Series Table Results are seasonally adjusted National Indices Dec 2016 Aug Sep Oct Nov Dec BNZ - BusinessNZ PMI Production Employment New Orders Finished Stocks Deliveries View PMI Time Series Data BNZ - BusinessNZ PMI Time Series January December

4 International Results J.P. Morgan Global Manufacturing PMI TM 2 January USA 55.0 UK 58.2 Japan 54.2 Eurozone 60.6 China 50.8 NZ 51.2 Australia 56.2 Sponsor Statement BNZ is delighted to be associated with the Performance of Manufacturing Index (PMI) and BusinessNZ. Media Comment For media comment, contact: Catherine Beard: The association brings together the significant experience of leading business advocacy body BusinessNZ, and business finance specialist BNZ. We look forward to continuing our association with BusinessNZ and associated regional organisations, and to playing our part in the ongoing development of the New Zealand manufacturing sector. Stephen Toplis: Technical Comment Stephen Summers: ssummers@businessnz.org.nz Level 6, JacksonStone House, 3-11 Hunter Street, Wellington admin@businessnz.org.nz

5 RESEARCH Performance of Manufacturing Index 19 January 2018 Aberration or Warning Sign An aberration or a warning sign of things to come? That s the question on our lips as we look at the data provided in the December Performance of Manufacturing Index (PMI). Whichever way you look at it, the data are disconcerting at face value. The 51.2 reported for the month of December was the lowest reading since December 2012, and the 6.5 point drop in the index between November and December has only been exceeded twice before (and one of those occasions was during the GFC). Widespread Retreat - We would expect some bounce back in activity once political uncertainties diminish; - These data are weaker than their equivalents in the NZIER QSBO; - We still believe that the key drivers of manufacturing (retail spending and housing construction will remain robust). - An improving international environment is a plus for exporters. All in all then, a set of data that sees us more nervous about New Zealand s state of affairs but not sufficiently so, yet, for us to pull the trigger on a forecast downgrade. Moreover, all components of the index were in retreat with production levels, new orders and deliveries of raw materials driving the slowdown. Unlike business confidence indices which should, in theory, foretell future developments, the PMI is telling it as it is, and it doesn t look great right now. PMI Slumps Diffusion Index, seas. adj PMI Momentum Month Degree of expansion 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 Breakeven Three Month Average Degree of contraction Unfortunately, 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. Consequently, stocks of finished products still sit above average levels even though new orders are well below. Manufacturing GDP has been having a good run of late with Q3 manufacturing GDP up 1.1%. We had assumed a softer result through Q4 and Q1 anyway but the PMI suggests there is some downside risk to our expectations which will be further exacerbated by recent weatheraffected agriculture production. GDP Headed Sub-Consensus As things stand, we are already forecasting a subconsensus 0.5% increase for Q4 economy-wide GDP. There appears to be increasing downside risk to this pick. Importantly, as a point of reference, the RBNZ has estimated the economy grew 0.9% through Q4 and Treasury 0.8%. The potential for surprise is thus clear BNZ/Business NZ Monthly Source: Weakness Widespread Index Points PMI Production Employment New Orders. Stocks Deliveries Source: BNZ, Business New Zealand stephen_toplis@bnz.co.nz Deviation From Average Be that as it may, we think it premature to conclude that the recent weakness in these data is a sign of impending doom. bnz.co.nz/research Page 1

6 Performance of Manufacturing Index 19 January 2018 Contact Details BNZ Research Stephen Toplis Head of Research Craig Ebert Senior Economist Doug Steel Senior Economist Jason Wong Senior Markets Strategist Nick Smyth Interest Rates Strategist Main Offices Wellington Level 4, Spark Central Willis Street Private Bag Wellington Mail Centre Lower Hutt 5045 New Zealand Toll Free: Auckland 80 Queen Street Private Bag Auckland 1142 New Zealand Toll Free: Christchurch 111 Cashel Street Christchurch 8011 New Zealand Toll Free: National Australia Bank Peter Jolly Global Head of Research Alan Oster Group Chief Economist Ray Attrill Head of FX Strategy Skye Masters Head of Fixed Income Research Wellington Foreign Exchange Fixed Income/Derivatives Sydney Foreign Exchange Fixed Income/Derivatives New York Foreign Exchange Fixed Income/Derivatives Hong Kong Foreign Exchange Fixed Income/Derivatives London Foreign Exchange Fixed Income/Derivatives ANALYST DISCLAIMER: The person or persons named as the author(s) of this report hereby certify that the views expressed in the research report accurately re flect their personal views about the subject securities and issuers and other subject matters discussed. No part of their compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in the research report. Research analysts responsible for this report receive compensation based upon, among other factors, the overall profi tability of the Markets Division of National Australia Bank Limited, a member of the National Australia Bank Group ( NAB ). The views of the author(s) do not necessarily reflect the views of NAB and are sub ject to change without notice. NAB may receive fees for banking services provided to an issuer of securities mentioned in this report. NAB, its affiliates and their respective officers, and employee s, including persons involved in the preparation or issuance of this report (subject to the policies of NAB), may also from time to time maintain a long or short position in, or purchase or sell a position in, hold or act as advisors, broke rs or commercial bankers in relation to the securities (or related securities and financial instruments), of companies mentioned in this report. NAB or its affiliates may engage in these transactions in a manner that is inconsistent with or contrary to any recommendations made in this report. NEW ZEALAND DISCLAIMER: This publication has been provided for general information only. Although every effort has been made to ensure th is publication is accurate the contents should not be relied upon or used as a basis for entering into any products described in this publication. Bank of New Zealand strongly recommends readers seek independent legal/financial advice prior to acting in relation to any of the matters discussed in this publication. Neither Bank of New Zealand nor any person involved in this publicatio n accepts any liability for any loss or damage whatsoever may directly or indirectly result from any advice, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication. USA DISCLAIMER: If this document is distributed in the United States, such distribution is by nabsecurities, LLC. This document is not intended as an offer or solicitation for the purchase or sale of any securities, financial instrument or product or to provide financial services. It is not the intention of nabsecurities to create legal relations on the basis of information provided herein. National Australia Bank Limited is not a registered bank in New Zealand. bnz.co.nz/research Page 2