What Impact Does Prolonged Contraction Have on New Zealand PMI and Interest Rates?

What Impact Does Prolonged Contraction Have on New Zealand PMI and Interest Rates?

Prolonged Contraction Dampens New Zealand PMI, Raises Interest Rate Concerns


New Zealand’s manufacturing sector has been in a prolonged state of contraction, raising concerns over its impact on the wider economy and interest rates. The latest BusinessNZ Performance of Manufacturing Index (PMI) shows a marginal improvement but remains below the crucial growth threshold of 50.

Resilient Manufacturing Despite Contraction

Despite the contraction, the manufacturing sector has shown resilience. The PMI climbed to 48.9 in April from 46.8 in March, indicating a slowdown in the rate of decline. This slight uptick is attributed to increased production and new orders.

Impact on Interest Rates

The persistent contraction in manufacturing, coupled with rising inflation, has put pressure on the Reserve Bank of New Zealand (RBNZ) to maintain interest rates at elevated levels. The RBNZ has signaled that it will continue raising rates until inflation is brought back to its target range of 1-3%.

Weakened Consumer Demand

The manufacturing sector’s struggles reflect a broader slowdown in the New Zealand economy. Weak consumer demand has dampened manufacturing activity, as households face rising living costs and higher interest rates.

Global Economic Headwinds

The global economic outlook also weighs on New Zealand’s manufacturing sector. The war in Ukraine, COVID-19 lockdowns in China, and supply chain disruptions continue to disrupt international trade and supply chains.

Outlook for Manufacturing

The outlook for New Zealand’s manufacturing sector remains uncertain. While the PMI indicates a slight improvement, the sector is still in contractionary territory. The extent of the recovery will depend on factors such as the strength of the domestic economy, global economic conditions, and the RBNZ’s monetary policy stance.

Key Points

  • The BusinessNZ PMI rose to 48.9 in April but remains below the growth threshold of 50.
  • The manufacturing sector has been in contraction for 14 consecutive months.
  • Rising inflation and weak consumer demand are contributing to the contraction.
  • The RBNZ is expected to maintain elevated interest rates to combat inflation.
  • The global economic outlook poses risks to New Zealand’s manufacturing recovery.

Expert Insight

“The improvement in the PMI is encouraging, but it’s too early to say whether it represents a sustained recovery,” says economist John Wheeler. “The RBNZ will likely remain cautious, as inflation remains well above its target range.”

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By Deepika

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