Data Flash (New Zealand)
Key points
General business confidence improved from +17% (net respondents) in July to +23% in August while firms' assessment of
the outlook for their own trading prospects improved from +36% to +40%.
Adjusting for seasonal effects, confidence declined marginally from +27 to +25% while trading prospects were unchanged
at +41 (the latter the highest level recorded since October 1999). However, the seasonal factors are volatile at this
time of year and should be treated with a degree of caution.
As the chart below shows, the current level of the `own trading prospects' indicator remains consistent with economic
growth of close to 4% over the next year - compared with the 2.5% to 3% growth forecast by both the RBNZ and us.
The remaining real economic activity indicators captured in the survey were, in general, little changed from July.
Manufacturer's export intentions rose from +43% to +51% - the strongest result since last November -likely reflecting
improved sentiment regarding the outlook for the Australian economy as well as seasonal factors. The outlook for
commercial construction improved somewhat but that for residential construction eased. For the first time in seven
months, on balance, respondents expect interest rates to rise over the next six months.
Pricing intentions were little changed from July but year-ahead inflation expectations ticked up 0.1pp to 2.9% - the
first rise since last September. In our view these indicators remain at levels that suggest inflation outcomes in the
top half of the RBNZ's 0-3% target range over the next 12 months at least.
Comment
The NBNZ survey supports our view that the New Zealand economy continues to weather the global downturn in good shape.
We had expected a slightly less optimistic result this month, with concerns about the impact of the drought on
electricity generation and pricing also expected to have impacted on confidence.
Following the RBNZ's `hawkish' August Monetary Policy Statement (MPS), the market priced out any chance of further
easing in New Zealand - a move that we thought was premature at that time. However, over the past two weeks, the market
has re-priced a slightly better than 50% chance of an easing at the 14 November MPS, largely on the back of a marked
re-evaluation of interest rate prospects in Australia.
The near-term outlook for domestic demand appears robust and there are upside risks to inflation from an economy already
operating at, if not beyond, full capacity. However, the global economy is stalling and, with each passing week,
convincing signs of a recovery seem no closer. Moreover, with commodity prices beginning to decline and the NZD now
strengthening, the two key factors that have mitigated the transmission of the global slowdown to the local economy are
beginning to weaken (albeit modestly so far). This suggests some risk that the economy may not be able to sustain its
recent good performance.
We think that probability of an easing in November is greater than the 30% chance we saw as likely in mid-August but, at
this stage, still less than a 50/50 proposition. As previously noted, we think that the probability of a move in rates
at the October interim review is low given the important domestic data that is due for release between the October and
November reviews.
Next week's important US data (the NAPM and Employment Report) and the actions and rhetoric of the RBA will be important
in driving market opinion regarding the next move in the New Zealand rates.
Ends