Quarterly Survey of Business Opinion - Q3 2001

Data Flash (New Zealand)
NZ: Quarterly Survey of Business Opinion - Q3 2001

Key Points

In seasonally adjusted terms, we estimate that business confidence plummeted from +16% (net respondents) in late June to -37% in late September. In unadjusted terms, confidence fell from +1 to -44.

The decline in confidence was the largest single fall recorded since the currency crisis in June 1984. Most responses were received after the RBNZ's surprise 50bps rate cut on 19 September but before the successful resolution of the Air New Zealand crisis.

Firms' remain more upbeat about prospects for their own trading activity. A net 11% of surveyed businesses expect an improvement in trading prospects in Q4 (down from +25 in the previous survey).

Activity remained buoyant in Q3, with a net 17% reporting increased levels of trading activity during the quarter and capacity utilisation rising from 0.900 to 0.906. At present, we estimate that GDP expanded by around 0.6% qoq in Q3. Most forward-looking indicators have weakened. The net proportion of respondents expecting to increase plant and machinery investment declined from +3 to 0. The net proportion of respondents expecting to raise employment levels declined from +8 to +1.

The net number of businesses reporting skill shortages declined slightly for the second consecutive quarter, although it remains at a comparatively high level (+39%).

Cost pressures declined in Q3, but are expected to strengthen slight in Q4, probably reflecting the renewed weakening in the NZD. A net 28% of respondents expect costs to rise in Q4.

Consistent with continued cost increases, pressures on selling prices have increased by a small amount (from +17% to +19%). While remaining below the levels recorded over most of the past two years, the net proportion of respondents expecting to raise selling prices remains high relative to the experience of the past decade.

Commentary

The apparent collapse in general business confidence echoes the decline in consumer confidence reported in Monday's TV3 Survey. The decline in confidence has been greater than recorded in the US and Australia - a reflection of the fickle nature of confidence in New Zealand.

That said, there is little doubt that confidence has taken a significant knock - a reaction to the events in the US on 11 September and, to a lesser extent, the near-collapse of Air New Zealand (although the recent Government rescue package will have eased concerns regarding the latter). It seems likely that this fall in confidence will be reflected in weaker employment growth and, with a lag, lower spending on investment. Similarly, the decline in consumer confidence points to a slowdown in retail spending growth. Firms' remain more optimistic about their own trading prospects. However, in light of the sharp parallel fall in consumer confidence, there is a significant risk that this optimism proves misplaced.

Although inflation indicators remain at relatively high levels, today's result increases the likelihood that the RBNZ eases the OCR further at its 14 November Monetary Policy Statement. Before today, we already believed that a 25bps cut to 5% was in the offing. Today's data - together with the consumer confidence and retail sales data released earlier in the week - reinforces our call.

Moreover, with the subsequent RBNZ meeting not scheduled until 24 January, we think that is a fair chance - perhaps 35% probability - that the RBNZ will cut by 50bps to 4.75%. The RBNZ's willingness to move aggressively will depend on how global data and events evolve and on the remaining key domestic data. The latter includes next week's Q3 CPI, the NBNZ business survey (due 31 October), labour market data (due in early November), and further surveys of consumer confidence.

As noted previously, given that measures of capacity use point uniformly to an economy presently operating above capacity, we think the RBNZ will be not unhappy with a decline in GDP growth to around the 2% mark over the next year (as suggested by our current forecasts). However, the RBNZ will wish to do its bit to help resist a much sharper slowdown in growth, as might occur if activity levels come to fully reflect current low levels of confidence. This might mean pushing interest rates more convincingly into `easy' territory, so as to reinforce the stimulatory impact of the weak NZD.

Should the magnitude of the global slowdown, or its impact on New Zealand, prove less severe than currently feared, we think that the RBNZ will not hesitate to reverse quickly recent and prospective precautionary easings. Moreover, in the current environment, the RBNZ is quite unlikely to be criticised for such a move.

Darren Gibbs, Senior Economist, New Zealand

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