Australian manufacturing activity fell for the 10th consecutive month in December amid continued weakness in the global economy, a private survey shows.
The Australian industry group performance of manufacturing index was unchanged at 44.3 last month but stayed below 50, which indicates a contraction in activity.
The falls in activity were largest in the non-metallic minerals products sub-sector, wood and paper products, as well as the textiles sub-sector.
Australian industry chief executive Innes Willox said weak global demand and the softening Australian economy were continuing to weigh on the manufacturing sector. "The pressures are widespread across the industry and in December no manufacturing sub-sector recorded an expansion in activity," he said. "Forward orders continue to track weakly, suggesting demand has not yet turned the corner."
The contraction potentially has grave implications for New Zealand, which counts Australia as its biggest export partner.
That's both in terms of demand for New Zealand-produced raw materials or partially finished goods used in final assembly, as well as consumer demand for Kiwi products as a weaker manufacturing sector puts pressure on jobs and wage growth across the Tasman.
It also has implications for the strength of the New Zealand dollar versus the Australian currency.
The Reserve Bank of Australia has cut its interest rate by 1.75 per cent since November 2011. The most recent cut was last month, by a quarter of a percentage point to 3 per cent.
Willox said the recent cuts had yet to offset the range of factors adversely impacting manufacturers and further reductions were likely over the next few months - a move likely to dent the appeal of the Australian currency among investors.
Meanwhile, the Reserve Bank of New Zealand is expected to keep the official cash rate on hold at the historically low level of 2.5 per cent for the next 12 months, which should be supportive of the kiwi.
That's likely to make New Zealand produced goods less appealing across the Tasman as their relative costs rise.
The New Zealand/Australian dollar cross rate last traded at 79.90 Australian cents, 80 basis points below its 2012 peak.
Still, economists are likely to take some relief from Chinese data which showed manufacturing activity expanded last month for a third straight month.