Data Flash NBNZ Business Survey (April 2002)

Data Flash (New Zealand) NBNZ Business Survey (April 2002)

Result: General confidence and firms' assessment of their own activity outlook fell slightly in unadjusted terms. However, adjusting for seasonal effects, we think that both indicators improved a little. Meanwhile, pricing indicators remain consistent with inflation outcomes nearer the top end of the 0-3% target range than to the middle. Implication for markets: The results indicate that the economy's growth momentum is broadly in line with its current growth potential. We think that the RBNZ will continue to raise the OCR gradually, complementing the firming in monetary conditions that is now occurring via a stronger NZD. We expect the Bank to hike the OCR by 25bps at each of the next two meetings (15 May and 3 July), returning the OCR to a broadly neutral 5.75%.

Commentary

The broad picture of the economy painted by the latest survey is once again little changed from a month earlier. In our view, the survey suggests that the economy's underlying growth momentum is broadly in line with its current (migrant-inflated) growth potential of 3.25-3.5% yoy.

Certainly, there remains no sign of the explosive economic growth seen in the mid 1990s, notwithstanding a buoyant housing market. General business confidence is still a little below its historic average (reflecting increasing pessimism in the agriculture sector) while firms' assessment of their own trading prospects is a little above its historic average (in seasonally adjusted terms). In our view, as interest rates continue to edge up, the NZD appreciates, the durable goods cycle runs its course and the reality of declining commodity prices sets in, the risk is that growth momentum slows, rather than accelerates. Our central forecast envisages that growth momentum will be sustained, but this hinges, in part, on our bullish view of global growth prospects (especially for New Zealand's key trading partners). Recent global data has raised the possibility that global growth might not meet our lofty expectations. That said, most central banks seem acutely aware that downside risks to global growth outlook remain. Therefore, accommodative monetary policy will eventually underpin a sustained economic recovery. The possibility of stronger net migrant inflows that previously envisaged provides a source of upside risk to growth.

As far as inflation indicators are concerned, year-ahead inflation expectations nudged up to 2.8% qoq. Rising pricing intentions in the construction sector (and to a lesser extent manufacturing and retail sectors) were offset by a sharp decline in pricing intentions in the agriculture sector. Most measures of `core' or `underlying' inflation suggest that inflation momentum remains more consistent with inflation outcomes nearer the top of the 0-3% target range than the middle. As we have noted before, these measures continue to be tainted by numerous factors that can be more closely linked to external price influences, regulatory changes and structural reform in particular markets, rather than clear evidence of excess demand (inflation in the housing sector is the obvious exception). However, the longer that headline inflation remains well above the mid-point of the target range, the greater the risk that medium-term inflation expectations deteriorate.

We think that the RBNZ will continue to gradually raise the OCR, complementing the firming in monetary conditions that is now occurring via a stronger NZD. We expect the Bank to raise the OCR by 25bps at each of the next two meetings (15 May and 3 July), returning the OCR to a broadly neutral 5.75%. Further 25bps rises in August and November are expected to take the OCR to 6.25% by year-end. Meanwhile, we have revised up our forecast for the NZD. By year-end, we expect the NZD to trade at USD 0.4800 and 56.5 on the trade-weighted index (TWI). Our forecast implies that the now abandoned monetary conditions index will return to positive territory on a sustained basis for the first time since mid-1998. This implies a substantially greater degree of overall monetary tightness than contained in the RBNZ's March Monetary Policy Statement projections - the RBNZ had assumed that the TWI would average 52.0 in H2 2002 and 53.25 in H1 2003.

Key points

General business confidence fell to +14% (net optimism) in April from +20% in March. Stronger confidence in the construction sector was more than offset by weaker confidence elsewhere and in the agriculture and retail sectors in particular. However, after adjusting for seasonal effects (respondents tend to be more optimistic during the summer months), confidence rose to +11% from +1% last month. Given unstable seasonal factors, the month on month change in the seasonally adjusted series should be interpreted with a degree of caution.

Firms remain more confident about their own activity outlook than about the economy more generally. A net 39% expect an improvement in their own business activity, down from 41% last month. After adjusting for seasonal factors, confidence rose to +35% from +32%. Based on past relationships, this indicator suggests that growth is running at around 3.5% yoy (in line with our forecasts). Most other real economy indicators were broadly unchanged this month, although employment intentions posted a solid rise (see table below).

Retailers' pricing intentions rose slightly to +32 from +31 last month, and remains consistent with our expectation that CPI inflation will remain well above 2% this year. Economy-wide pricing intentions fell to +23 from +25 last month, reflecting a sharp decline in pricing intentions in the agriculture sector. Year-ahead inflation expectations nudged higher to 2.8% (we note that the forward-looking information content of this measure is dubious as inflation expectations seem to closely follow developments in actual inflation).

A net 87% of businesses expect interest rates to rise, up from a net 65.1% last month.

Darren Gibbs, Senior Economist, New Zealand

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