World Cup, commodity prices to boost business confidence

The manufacturing industry is upbeat about the state of the economy. Photo / Natalie Slade

A barometer of the manufacturing sector is pointing to expansion for the fourth month in a row.

The BNZ-Business New Zealand performance of manufacturing index for January was 53.7, up from 52.3 in December, though it remains at levels below those prevailing in the first half of last year.

Any reading above 50 indicates expansion.

New orders are at the highest level since April last year, as is the ratio of new orders to inventory.

"The widening gap between new orders and inventory is a pointer to more production ahead and a positive contribution from manufacturing to GDP growth," said BNZ economist Doug Steel.

But averages could mark wide variations and that was particularly true of the manufacturing sector at the moment, he said.

"For example, performance will depend on one's relative exposure to the weak domestic property market, cautious domestic consumer, generally stronger demand in emerging market economies, competition from foreign competitors, high commodity export incomes, high commodity input costs, a high New Zealand dollar against the US dollar, euro and pound, a low New Zealand dollar against the Australian dollar, and the changed market conditions following the earthquakes in Canterbury and floods on the east coast of Australia."

The food and beverage, and machinery and equipment manufacturing sectors were the most upbeat.

Respondents' comments about market conditions were more often negative than positive, the main issues being the holiday period slowdown, and exchange rate challenges.

The BNZ economists believe this year will see some strong economic growth, buoyed by solid world growth, soaring commodity prices and a recovery in primary production after recent droughts, the Rugby World Cup and post-earthquake reconstruction in Canterbury, and improving labour market, the lagged impact of tax cuts and the inventory cycle.

"Unfortunately, calendar 2012 will see the reversal of many of the one-offs, resulting in a period of very subdued growth," Steel said.