NZIER survey showed price pressures subdued in NZ

NZIER survey showed price pressures subdued in NZ

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The NZIER Quarterly Survey of Business Opinion (QSBO) signaled that the recovery underway in New Zealand continues, although at a slower pace than firms expected when last surveyed three months ago. The headline reading eased back from +31 in the December quarter to +22 (J.P. Morgan: +25) in 1Q, meaning that a net 22% of firms surveyed expect the economy to improve in the next six months. As the chart below suggests, however, 1Q and 2Q GDP growth should print at healthy levels, with our forecast calling for annual growth to return to 2%-plus rates in both quarters.

The QSBO showed that investment intentions surged in the March quarter to above long run average levels. Intentions to invest in buildings improved (to -5% from -15%) and plant investment intentions moved into positive territory (to +9% from -2%). Even though investment intentions picked up, however, it remains unclear as to whether this translates to new hiring.

The QSBO survey showed that, although hiring intentions have been marginally positive in recent quarters (+2% in 1Q and +1% in 4Q), actual hiring is still below long run averages. Further weakness in the labour market is expected, particularly given the decline in profitability in 1Q (to -19% from -14%) which suggests that a significant pick up in new hiring may be delayed. This means that, although the unemployment rate has probably already peaked (at 7.3% in 4Q), with excess capacity in the labour market, wage growth will remain subdued this year.

The survey showed that price pressures remain contained given that firms are not able to raise prices to the extent they would like, with weak domestic demand reducing firms’ pricing power. That said, more than a quarter (27%) of firms expect to increase selling prices in the next three months. Capacity utilization fell slightly to 90.5% from 91.1% in the previous quarter, although NZIER highlighted the volatility in this indicator in recent quarters, owing to a significant inventory adjustment.

An overwhelming 94% of firms surveyed in the QSBO expect interest rates to be higher over the next twelve months. Indeed, we believe the first rate hike will be delivered in July, beyond the consensus forecast for a June move. Our feeling is that Governor Bollard wants hard evidence that the recovery is sustainable, so will sit on the policy sidelines until after the late-June release of the 1Q GDP report. The disappointing reads on the recent economic data mean, though, that the risks to our July OCR call are skewed toward an even later move, particularly given that near term inflationary pressures remain subdued. .

ENDS

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