Kiwi Economics - Our Take

The fall in business confidence is a crushing blow. RBNZ rate cuts are coming.
The RBNZ are likely to cut the OCR in May, and again in August (or possibly June).

Key points

• The fall in business confidence is concerning. Uncertainty kills confidence. No confidence kills growth. It’s time for a man of action, to take action.

• The rebound in the last QSBO survey, was reversed today. A net 27% of firms see a deterioration in conditions over the year ahead. And they’ve seen a deterioration in their own activity, and profitability.

• We expect the RBNZ to cut 25bps in May, and deliver a quickfire second 25bps in (June or) August. Of course the risk thereafter, is 1.25% is not the low.

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Today’s reversal in business confidence is concerning. The lack of confidence amongst our business leaders points to difficult times ahead. The QSBO survey mirrors the ANZ survey, and confirms what the RBNZ must be hearing in their direct liaison with Kiwi corporates. The reduction in firms’ own activity measures, and profitability throw up some red flags. Firms continue to face labour shortages, higher costs, and an inability to recover escalating costs. Profitability is being squeezed.

A net 27% of Kiwi firms expect economic conditions to deteriorate over the next 12 months. Confidence dropped back to 3Q’18 levels when uncertainty around government policy was at its height. But it’s firms’ domestic trading activity that disappointed the most. A net 1% of firms experienced a deterioration in trading activity over the first quarter of 2019, which points to slowing GDP growth over this period. Only a net 7% expect an increase in their own trading activity in the coming quarter, that’s well below the survey average of 15%. This points to disappointing GDP growth over the second quarter of the year.

For the RBNZ the reverse in confidence is one thing, but to the deterioration in firms’ expectations for their own trading activity is much more of a concern. Within the context of a gloomier global outlook and central banks around the world stepping back from policy tightening, today’s business confidence report supports a local monetary policy response. In our view we think the RBNZ will deliver just that as part of its May Monetary Policy Statement (MPS) with a 25bp cut to the OCR, followed by another in (June or) August.

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