Buoyancy may hit critical bump

BUOYANT manufacturing is picking up even more steam, but the economy is at a risky turning point, and the dollar and interest rates could move sharply and in unexpected ways.

Despite a high NZ dollar, the latest BNZ-Business New Zealand Performance of Manufacturing Index shows a reading of 58.4 points in March, up 1.9 points on the previous month. An index above 50 indicates the sector is growing.

Activity is now running at its best pace since the middle of last year. Manufacturing has been expanding for 19 months in a row.

BNZ head of research Stephen Toplis said: ‘‘The manufacturing sector is in a buoyant mood – and rightly so.’’

The overall index, and levels of both production and new orders, were all near 10-year highs, even with the currency trading above US87c yesterday.

Local manufacturers were making the most of strong domestic demand, higher primary-sector production, and trade links with fast-rising Asian economies.

However, the economy and financial markets were at an ‘‘inflection point’’.

‘‘At such times, the potential for significant movements in interest rates and exchange rates is heightened.’’

Businesses needed think about how to manage their risks if the kiwi went from strength to strength and interest rates rose more slowly than expected.

Yesterday, the NZ dollar reached a three-year high, above US87 cents, moving up almost US1c after the United States Federal Reserve lowered expectations of interest-rate hikes in the US.

Falling commodity prices, especially global dairy prices in the past year, would typically cause the New Zealand currency to drop but, if international investors focused on the other positive things about New Zealand, the dollar could keep rising, the BNZ said.

If so, interest rate rises would be slower than expected, exporters would face poorer returns and importers would be ‘‘dancing in the street’’.

And the housing market even more overvalued’’.

The other ‘‘equally plausible’’ alternative was that an already overvalued NZ dollar could plunge, forcing the Reserve Bank to raise the OCR much more aggressively than expected. If that happened, importers would need to be highly hedged against a move in the currency to protect against rising costs and exports should not be hedged at all.

If, as well, interest rates jumped fast,

‘‘will

get those with debt should be moving fixed terms ‘‘aggressively’’.

‘‘Homeowners should be prepared for house price falls,’’ Toplis said.

Meanwhile, the PMI survey also showed both production and new orders were at a strong 60.5 points. The employment index was up 1.6 points to 56.3 points, its highest since the end of 2007 before the global financial crisis.

All four regions showed good expansion in manufacturing. Machinery and equipment manufacturing was the strongest sector, with an index of 64.4 points, picking up from February.

The proportion of positive comments from manufacturers for March broke the 60 per cent mark for the first time this year, as new orders/customers and an improving economy provided a stronger platform for business growth.

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