Data Flash (New Zealand)
NBNZ Business Confidence Survey - July 2000
Global Markets Research
A net 36% of respondents were pessimistic about the general business outlook. Though still very negative in absolute
terms, this result represented a significant improvement on the net 56% of respondents who were pessimistic in the June
A net 7% of respondents were optimistic about the outlook for their own business. This compared to a net 4% who were
pessimistic in June. Optimism was greatest in the agricultural and manufacturing sectors. The construction sector was
the only sector pessimistic about its own activity outlook.
Other indicators of activity have also turned around. A net 8% of firms expect to reduce employment over the net six
months, down from a net 15% in June. Investment intentions and profit expectations are also less negative. Capacity
utilisation increased for the first time since March.
Somewhat surprisingly, optimism regarding exports was down slightly, though a net 31% of firms remained optimistic about
Costs pressures continue to remain evident. A net 29% of firms expect to raise prices over the next six months.
Commentary We have argued for some time that the fall in business confidence is out of step with generally good
aggregate demand fundamentals for the economy, with continued strong growth in the world economy and the weak exchange
rate providing a significant boost to the export sector. In our view, there is little doubt that the excess negativity
in recent surveys largely reflects firms' attempts to express their concerns about the direction of Government policy
and about the Employment Relations Bill in particular. Since the June survey, the Government's so called `charm
offensive' has fostered the expectation that the redrafted Bill will meet many of employers' key concerns. The latest
NBNZ survey confirms anecdotal evidence that confidence has begun to turn around, albeit gradually. Of greater
significance, firms' assessment of their own activity outlook has moved back into positive territory. The Reserve Bank
pays greater attention to this indicator than to overall business confidence, the latter subject to greater volatility.
Is the rebound in confidence of sufficient magnitude to raise the likelihood of the RBNZ hiking rates when it next
considers policy settings on 16 August? Had the National Bank survey shown little improvement from the depths of despair
recorded in June, we would have been forced to concede that the balance of risks would have shifted decisively towards
no rate hike. However, the rebound in business confidence, the return of the activity indicator to positive territory,
and continued evidence of strong cost pressures means that we are, at present, sticking with our call of a 25bp hike in
August (though we have some sympathy with the view that the Bank should hold off until the rebound in confidence is
confirmed). Nonetheless, it is a close call, with tactical issues perhaps playing at least as great a role as economics.
We remain more confident in our call that the OCR will be at least 25bps higher than at present following the 4 October
Interim Review. Employment, retail and building data published over the next two weeks will provide further insights
regarding activity levels during Q2. At the margin, Thursday's Household Labour Force Survey, in particular, could have
an influence on the Bank's policy decision (we will reassess our rate call once this data is released). However, we
think the key debate concerns the likely performance of the economy over the next year - all would agree that growth
during Q2 has been weak at best. In this context, more fundamental factors, such as the outlook for world growth, the
terms of trade and business and consumer confidence will help to determine on which side of the fence the Bank comes
down. On this score, we think the RBNZ will share our view that growth is likely to have recovered to trend levels by
the end of this year, with the prospects for even stronger growth a distinct possibility if monetary conditions remain
at current levels.
Darren Gibbs, Senior Economist, New Zealand
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