Two days ago the NZIER Quarterly survey of business opinion (QSBO) told us that firm confidence is low – but pricing intentions are high. Today the Business New Zealand performance of manufacturing index (PMI) told us that manufacturing activity was contracting for the first time since January 2006.
Both of these results are poor, so lets have a slightly closer look at them.
Lets start off with the PMI. Below is a graph of the PMI, and the two main components that fell over March, production and new orders:
As you can tell by looking at the graph, production and new orders have been above average performers in most of the months months over the last two years. A reduction in these factors is concerning, as it appears to indicate that underlying production in the industry is causing this fall in activity – compared to a reduction in employment which could be the result of higher labour productivity (and then could be a net positive for the our later manufacturing numbers).
Part of the reason that the production index will be falling is the drought. Although the first effect of the drought will be destocking activity (we have seen lamb slaughters rise significantly since December), the eventual impact will be a lower level of production from agriculture. As about 1/3 of New Zealand’s manufacturing activity is in food, beverage etc manufacturing, what happens here has a big impact on any manufacturing index. However, downside risks remain, as the exchange rate and a gloomy outlook were the main negative factors mentioned by respondants – not the drought.
The QSBO result was interesting. The significant fall in business confidence mirrored the result of the National Bank business outlook. However, pricing pressures remain intense, with 42% of firms saying they lifted prices in the March quarter (the highest value since March 1987) and 45% of firms saying they will have to lift prices. If you think this is excessive, 59% of firms had cost increases over March (the highest level since June 1987) and 62% expect cost increases in over the June quarter (the highest level since March 1987).
All in all this paints a picture of low economics growth and high inflation point to stagflation – the very thing Bernard Hickey is concerned about.
However, I’d run with BNZ here and say that what happens to NZ depends on what happens to our trading partners. Although consumer confidence in Aussie is weakening commodity prices remain strong. For commodity exporters like NZ and our neighbor Australia this is a good thing. Hopefully, as long as the Fed keeps interest rates low, investors will continue to use commodities as a store of value – keeping prices up, and helping us maintain some semblance of economic growth. Confidence is a fickle measure.
Negative media sentiment can drive down confidence without any of the fundamentals actually falling (Keynes’s animal spirits – it is the nature of expectations after all!). In this case there are negative factors that are hurting businesses and households (petrol prices, food prices). However, any true reduction in activity will have to take place amongst the fundamentals – will retail sales fall, will we suddenly turn around and start saving the income gained from the terms of trade and our upcoming tax cuts?