(Bloomberg) -- New Zealand’s manufacturing industry has contracted for a record 18th consecutive month, adding to signs the economy has stalled under the weight of high interest rates.
The Performance of Manufacturing Index rose to 45.8 in August from a revised 44.4 in July, Business New Zealand and Bank of New Zealand said Friday in Wellington. The index was last above 50, indicating expansion, in February 2023.
Data next week is forecast to show the economy shrank in the three months through June, while the Reserve Bank is projecting a further contraction in the third quarter that would tip the nation into its third recession in less than two years. While policymakers started to cut the Official Cash Rate last month, it will take some time before any benefits flow through to businesses and households.
“Business confidence and building consent indicators have ticked up from their very low levels, offering potential for improvement over the coming 12 months,” said BNZ Senior Economist Doug Steel. Still, “the PMI is an indicator of outcomes and continues to show that current conditions remain challenging.”
Manufacturing has come under pressure as high borrowing costs curb home building, slowing demand for locally produced wallboard, concrete and other materials. At the same time, gloomy consumers haven’t been buying new appliances or furniture.
Despite sluggish economic growth in early 2024, the RBNZ held the OCR at 5.5% and in May even warned of the risk of a further tightening. It reversed its stance in August with a quarter-point cut to 5.25%, saying the economic downturn had made it more confident that inflation was coming under control.
The PMI has lifted from 41.4 in June, which was the lowest level since February 2009 outside the pandemic period.
Today’s report showed a gauge of new orders lifting to 46.8 after it was below 40 in June.
“It is a step in the right direction and if this trend continues it is not far from indicating an upturn in demand,” said Steel. “While falling interest rates will support demand, it will take time for the lower OCR to generate a pick-up in sales.”
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