Confidence drops on the back of 3 rate rises, NZD

Business confidence drops on the back of 3 RBNZ rate rises and a relentless NZD

According to the latest NZIER quarterly survey of business opinion, general business confidence dropped to -37 in 2Q (down from -15 in 1Q). The growing pessimism recorded in the survey was 'widespread' and expected. The decline in confidence is reflective of three 25bp RBNZ rate rises and a relentless NZD which is currently trading at post-float highs. The NZD has risen a further 10% over the past quarter. All key indicators of capacity usage and inflation (capacity utilization, difficulty finding labour, pricing and cost intentions) fell over the quarter, and despite remaining at high levels point to lower inflation pressure in the pipeline.

The RBNZ will take some comfort in today's report, as there were no upside surprises in the underlying components of the survey, but maintain a vigilant tightening bias for the remainder of 2007. The slight reduction in all inflation indicators will give the RBNZ some breathing space, and allow the bank to sit on the sidelines and assess the impact of its past tightening. Today's report is a step in the right direction - from the RBNZ's viewpoint - but is no cause for complacency.

Key points:

Trading activity experience dropped to 8% in 2Q from 11%. Trading intentions dropped to 9% from 16%. The trading activity experience component provides a useful lead on quarterly GDP growth (chart);

Average costs dropped to 46% from 49%, and average selling prices intentions dropped to 25% from 27%;

Profitability fell to -21% from -17%;

Capacity utilisation dropped to 91.6% from 91.8%; and

Ease of finding skilled labour fell to -42% from -41%, highlighting continued tightness in the labour market;

*All percentages represent the 'net percent of respondents that experience/expect an increase in the component.

ENDS

See... New Zealand economic update, July 2007 (PDF)

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