NBNZ Business Survey - July 2002

NBNZ Business Survey - July 2002
Data Flash (New Zealand)

NBNZ Business Survey - July 2002

Result: While headline business confidence fell to -22% (net respondents), firms' assessment of their own prospects remained significantly more positive at +26%, similar to investment and employment intentions.

Implication for markets: While the headline confidence number may have strengthened the market's view that the RBNZ will not tighten on 14 August, the Bank is likely to pay more attention to the less volatile components of the survey listed above.

Commentary

Not surprisingly, headline business confidence has continued to fall on the back of renewed concerns about the international growth outlook and increasing signs that the domestic economy is slowing from the 4% p.a. growth pace enjoyed over the first half of 2002. However, it is important to remember that the headline measure always exhibits significantly more volatility than responses to the more specific survey questions (see above chart). Firms' collective assessment of their own trading prospects has remained at around its historical average, which is consistent with 2¯% GDP growth (see chart above). In line with that, investment and hiring intentions are at or slightly above historic averages.

As far as the survey's influence on the RBNZ's decision-making is concerned, it should be noted that the Bank pays more attention to the less volatile firm-specific survey components (trading prospects, investment and employment intentions). As the above chart shows, firms' current views on their trading prospects are entirely consistent with the growth forecasts published by the RBNZ in May. The slight drop in that series experienced over the past month has simply brought it in line with that forecast - from previous level that looked too high. The other factor that will receive RBNZ attention is the apparent lack of progress in pushing inflation expectations and economy wide-pricing intentions down significantly further despite the NZD strength at the time of the survey (first half of July). Since then the TWI has fallen back by 3.5%, which could point to a rebound in pricing intentions in the next survey. In summary, notwithstanding the somewhat dramatic fall in headline confidence, we expect these data to have a neutral influence on the RBNZ's decision-making.

Key points

General business confidence fell to -22% (net respondents) in July from -7% in June. Taking account of seasonal influences, confidence was at -13%. All sectors recorded a decline.

Firms remain more confident about their own activity outlook than about the economy more generally. A net 27% expect an improvement in their own business activity, down 7% compared with last month. After adjusting for seasonal factors, confidence fell to +32% from +39%. The historical average of that series is +30%.

Most other real economy indicators have fallen further over the past month, but remain at or above historical averages. Investment intentions were down 3 to +18% (historical average: +15%), while employment intentions were also down 3 to 10% (historical average: +9%). The key exception was export expectations, which deteriorated significantly from +35% to +27%, driven by increased pessimism in the manufacturing sector about the high level of the NZD/AUD cross rate.

Retailers' pricing intentions eased further from +25% to +19%. However, economy-wide intentions remained unchanged at +16%. Year-ahead inflation expectations were unchanged at around 2.85%.

Ulf Schoefisch, Chief Economist, New Zealand

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