Confidence rose on NZD decline, dairy payout

NBNZ business confidence rose on NZD decline and higher dairy payout

Today's release of the August NBNZ business confidence index showed a slight improvement in confidence after the NZD tumbled US 10 cents from its high (US 0.81 cents) and Fonterra (New Zealand's largest dairy cooperative) announced a massive increase to its forecast 2007/08 payout to producers. Business confidence made a marginal improvement to -34% (net percent of respondents expecting the economy to deteriorate over the coming year) from -39 in July. All sectors excluding retail posted an improvement in expectations.

More importantly for the economic outlook, trading activity expectations (which correlate nicely with growth in GDP) rose 5 points to a net 17% of businesses expecting an improvement over the coming year. The result points to a stabilization in economic growth in 3Q after a poor 2Q outcome (see chart). Despite the stabilisation in the activity outlook, JPMorgan forecasts consumption growth and GDP growth to remain weak in 2H07, before improving in 2008.

Employment intentions and inflation expectations were unchanged. Pricing intentions, however were up over the month and point to headline inflation remaining in the top-half of the RBNZ's 1-3%oya target range for a prolonged period.

Private sector credit growth eased in July, in line with RBNZ requirements for rates to stay on hold

The RBNZ's private sector credit aggregates (residential) posted a subdued 1.3%m/m gain in July, taking the annual rate to 13.8%oya (down from 14.4%oya in June). The July credit aggregates made another step in the right direction from the RBNZ's viewpoint, and should continue to head south from here. In the RBNZ's July OCR (official cash rate) announcement, which included a 25bp rate hike to the record 8.25%, Governor Alan Bollard made it clear that in order for the RBNZ to remain on hold, credit growth had to slow. "New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation."

Credit growth is indeed slowing, and the recent financial market turmoil, coupled with a number of non-bank finance company collapses, (seven in total since last year), the availability of credit for personal finance (especially low quality car loans) will dry up. Consumers' access to finance will be affected by recent adverse developments in the market, which will in turn trim consumption growth. At the margin, retail spending (especially on cars) is likely to be held back as a result.

See... Full Release with charts (PDF)

© Scoop Media