Index points to better times for manufacturing

A barometer of the manufacturing sector is pointing to better weather.

The BNZ-Business New Zealand monthly performance of manufacturing index rose 2.7 points in March to 56.3, its highest reading since late 2007.

Any number above 50 indicates expansion and the index has been back in positive territory for seven months now.

Business New Zealand noted that the proportion of negative comments from respondents dropped to 43 per cent from 66 per cent in February.

Positive comments focused strongly on increased demand, both domestic and overseas.

Bank of New Zealand economist Doug Steel pointed out, however, that the rebound in manufacturing was from a low base as the sector had been hit particularly hard by the recession.

Even after manufacturing value added jumped 4.5 per cent in the last quarter of 2008 it was still 16 per cent below its last peak, back in 2005. Manufacturers are benefiting from the inventory cycle as firms rebuild stocks run down in the recession.

That is helpful but will not last forever. The other big factor is Australia, their biggest export market.

Not only did it avoid recession during the global crisis, its prospects had improved so much that the Reserve Bank of Australia had already raised interest rates five times since October, Steel said.

In addition, the transtasman exchange rate has lately been at the most exporter-friendly level since late 2000.

"This is clearly positive but we are also conscious of the fact that the longer the China-driven commodity boom lasts and the more Australian resources are assigned to it, the more vulnerable we become to a correction," Steel said.

"This is not a forecast that we think the commodity boom will correct, merely a note of the risks associated with increasing dependence on effectively one market."