Business confidence at 35-year low

Business confidence at 35-year low; prolonged recession expected

•Business confidence fell to a 35-year low
•Rate of labour shedding to accelerate
•RBNZ to cut OCR on April 30

The NZIER Quarterly Survey of Business Opinion (QSBO) released today pointed to a weakening domestic economy and easing price pressures. General business confidence slipped to a 35-year low in 1Q as New Zealand’s prolonged recession continued.

The headline reading fell to -65, suggesting a net 65% of firms expect the economy to deteriorate in the next six months; this was only slightly lower than the 64% in the previous quarter, but the components of the 1Q survey painted a much bleaker picture. On our forecast, the New Zealand economy will contract for at least another two quarters, having already contracted in each quarter of 2008. Indeed, this survey highlights the risks that the recession underway will be even more prolonged than we currently forecast.

A breakdown of the data painted a bleak picture. The capital utilization index fell to 86.3%, the lowest since 1992, from 88.8% in the previous survey, and a net 36% of companies expect to shed workers, compared to 32% previously; 45% expect profits will fall. A net 38% of those surveyed expect trading will slow and a net 44% expect to invest less in plant and machinery. In fact, investment intentions for the next six months are the lowest on record - the series began in 1975.

The dismal economic outlook, combined with easing price pressures, provides plenty of scope for the RBNZ to continue easing policy. With the official rate at 3% currently, the RBNZ has plenty of policy ammunition in reserve. Our current forecast looks for a 25bp cut at the April 30 meeting, although, given that the recent upward pressure on longer-term interest rates and NZD have caused monetary conditions to tighten, a 50bp cut has become more likely.

It will be important for our RBNZ call to watch whether the RBA delivers a 50bp rate cut, a 25bp move, or nothing at all this afternoon (we forecast a 50bp move), how the data prints in New Zealand next week (including retail sales on Tuesday), and whether we see more jawboning from the RBNZ. On the latter, just last week, RBNZ Governor Alan Bollard voiced his concern in a statement that the recent rise in wholesale interest rates was “unwarranted” and “inconsistent with the monetary policy outlook.” The distortion that has emerged in rates markets of late, if it were to continue, would create further pressure on firms and households attempting to borrow; hence, Dr. Bollard’s efforts to send a message last Wednesday that interest rates will remain low for an extended period.

ENDS

© Scoop Media