NZ: Business confidence improving

New Zealand: business confidence improving, but recession has further to run

• Business confidence improved markedly, though still weak
• Recession has further to run; GDP growth should turn positive in 4Q
• Worst for households still ahead as unemployment rises

The NZIER Quarterly Survey of Business Opinion (QSBO) released this morning showed a marked improvement, with the headline reading climbing to -25 (from -65), meaning that "only" a net 25% of firms surveyed last quarter expected the economy to deteriorate in the next six months. Fewer businesses surveyed expect their own trading activity, a leading indicator of GDP growth (chart), to decline in the next three months –only a net 10% of firms expected a decrease in output and sales, up from 36% previously.

But, while the QSBO showed a significant improvement in business sentiment from the previous two surveys, the results in the previous surveys did paint a dismal picture. All key activity indicators in the 2Q survey were still in negative territory, supporting our view that, though the rate of slippage will ease, the economy will still contract again in 2Q and 3Q. The significant monetary and fiscal policy easing that has been delivered should help New Zealand begin to expand again in 4Q. The main risk to the recovery we forecast to commence later this year is the strengthening of the NZ dollar, which is adding to the broader tightening in financial market conditions.

Investment intentions improved from record lows, but remained weak, not surprisingly given the profitability outlook remains dire. A net 29% of firms intend to reduce investment in buildings over the next 12 months, and a net 23% expect to reduce investment on plant and machinery. The poor investment picture has negative implications for the employment outlook. A net 19% of firms intend to cut staff over the next three months, supporting the view that unemployment will continue to rise. Our forecast calls for the unemployment rate to approach 8% in 2010. The resulting fall in labour income, combined with rising petrol prices will dampen households’ purchasing power, increasing the headwinds faced by consumers in 2H09. Recent signs of strength in the housing market, though, should to some extent buoy confidence in the highly leveraged Kiwi household sector. In the QSBO today, the greatest improvement by industry was in building, adding further to recent evidence that the housing market has started to stabilize after a prolonged downturn.

The jump in capital utilization to 91% reported in the survey was the largest quarterly increase on record, a reflection of firms running on “leaner operations” after trimming costs in response to weaker demand. Pricing intentions remain relatively stable, so the spike in capital utilization is not necessarily a sign that inflationary pressures will increase (just yet), and should not unnerve the RBNZ. We believe the next rate move from the RBNZ will be up rather than down, with our forecast calling for the RBNZ to hike the OCR to 3.5% by the end of 2010. Interestingly, interest rate expectations turned positive in today’s QSBO survey, with a net 23% of financial services firms expecting interest rates to be higher over the next year.

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