NBNZ Business Survey (May 2002)

Data Flash (New Zealand)

NBNZ Business Survey (May 2002)

NBNZ Business Survey (May 2002)

Result: In unadjusted terms, general confidence has again fallen while firms' assessment of their own activity outlook was stable. Adjusting for seasonal effects, we think that both indicators improved a little. Meanwhile, pricing intentions have fallen in the agriculture, manufacturing and retailing sectors, in part likely reflecting the first signs of the impact of a stronger NZD.

Implication for markets: We expect the Bank to hike the OCR by 25bps at each of the next two meetings (3 July and 14 August), taking the OCR to a broadly neutral 6%, and complementing the firming in monetary conditions that is now occurring via a stronger NZD. But with downside risks to the growth outlook beginning to mount, the likelihood that the OCR will reach the 6.75% level signalled in the RBNZ's May MPS is fast reducing.

Commentary

The broad picture of the economy painted by the latest survey is again little changed from a month earlier. In our view, the survey suggests that the economy’s underlying growth momentum is broadly in line with its current (migrant-inflated) growth potential of 3.25-3.5% yoy. There remains no sign of the explosive growth seen in the mid 1990s, notwithstanding a buoyant housing market. General business confidence is still below its historic average while firms’ assessment of their own trading prospects is above its historic average. The true state of the economy probably lies somewhere in between. Since this survey was taken, the RBNZ has hiked the OCR by 25bps and accompanied that with a hawkish statement. For the most part, this is likely to have accorded with firms’ expectations. However, over the same period the TWI has appreciated by a further 4%, which is likely to have come as a surprise to firms (not to mention currency forecasters). The June survey will be very interesting indeed.

In our view, although the latest survey depicts a solid economy, the downside risks to growth over the coming 12-18 months are mounting. In the near-term, buoyant domestic demand, reflecting the lagged effects of monetary easing, strong growth in rural incomes and net migrant inflows will encourage the RBNZ to continue with its course of rate hikes. And with the Fed on hold until at least August - and quite possibly longer - widening short-term interest rate differentials are expected to assist in pushing the NZD to 0.5100 by year-end (58.0 on the TWI) - a level at which the exchange rate will no longer be providing stimulus to the external sector. Meanwhile, the rural sector, which is already further hindered by weak global commodity prices - especially in the dairy sector - may well have to contend with El Nino climatic conditions over the coming season. Recent reports suggest that the possibility of El Nino conditions - which tend to bring drier than usual weather in the main farming regions - is rising rapidly.

Nonetheless, for now, our central forecast envisages that growth momentum will moderate to a still reasonable 2.5% yoy over the next 12-18 months (from around 4% yoy at present). This hinges, in part, on our still bullish view of global growth prospects (especially for New Zealand’s key trading partners). Recent data has raised the possibility that US growth might not meet our expectations, while downside risks to growth in Australia would also occur if El Nino conditions develop. The possibility of stronger net migrant inflows that previously envisaged provides a source of upside risk to growth. But if migrant flows ease more quickly than we have assumed, demand momentum in the economy could subside very rapidly.

As far as inflation indicators are concerned, year-ahead inflation expectations nudged up to 2.9% qoq (this measure tends to follow actual developments in inflation). However, pricing intentions have continued to moderate, with the decline in pricing intentions in the retail and manufacturing sectors extremely sharp over the past month. Most measures of “core’ or “underlying’ inflation suggest that near-term inflation momentum remains more consistent with inflation outcomes nearer the top of the 0-3% target range than the middle. As we have noted before, these measures continue to be tainted by numerous factors that can be more closely linked to external price influences, regulatory changes and structural reform in particular markets, rather than clear evidence of excess demand (inflation in the housing sector is the obvious exception).

We think that the RBNZ will continue raise the OCR by 25bps at both the 3 July and 14 August meetings, taking the OCR to a broadly neutral 6%, and complementing the firming in monetary conditions that is now occurring via a stronger NZD. The outlook beyond August is uncertain, but for now we are maintaining our view that the RBNZ will skip the October meeting before implementing a further 25bp hike in November to take the OCR to 6.25% by year-end.

Key points

- General business confidence fell to +7% (net optimism) in May from +14% in April. Confidence has continued to plummet in the agriculture sector (to -40%). All sectors with the exception of the retail sector registered a decline. After adjusting for seasonal effects (respondents tend to be more optimistic during the summer months), we think confidence rose to +14% from +11% last month. However, given unstable seasonal factors, the month on month change in the seasonally adjusted series should be interpreted with a degree of caution.

- Firms remain more confident about their own activity outlook than about the economy more generally. A net 39% expect an improvement in their own business activity, unchanged from last month. After adjusting for seasonal factors, confidence rose to +40% from +36% - a level similar to that seen prior to the 11 September tragedy. Most other real economy indicators were broadly unchanged this month (see table below).

- Retailers’ pricing intentions eased slightly to +29 from +32 last month - the lowest level recorded this year. At current levels it remains consistent with our expectation that CPI inflation will remain well above 2% this year. Economy-wide pricing intentions fell to +20 from +23 last month, with the construction sector the only sector to buck the downwards trend. Year-ahead inflation expectations nudged higher to 2.9%.

Darren Gibbs, Senior Economist, New Zealand

***The attached research constitutes Deutsche Bank's proprietary

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is available on our web site http://research.gm.db.com

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