NBNZ confidence falls most in history of series

New Zealand: NBNZ business confidence falls most in history of series

• NBNZ business confidence falls most in history of series

• Business confidence index at -42.3 in October

• Firms' own activity expectations slump to -11

The NBNZ business confidence survey slumped in October to -42.3 from +1.6 in the previous month, marking the largest one month fall in the history of the series. The headline reading suggests that a net 42.3% of respondents expect business conditions to worsen in the coming year. More importantly, firms' own activity expectations tanked to -11.4 from +16.7, pointing to significantly weaker economic growth in coming quarters (chart). According to the NBNZ, this is the second lowest reading on record and the largest intra-month decline.

Confidence worsened across the board, slumping sharply in the commercial (-39%) and residential (-33%) construction sectors. The survey showed that 13% of respondents expect their investments will fall, 32% expect profits will decline, and only 20% expect that prices will rise (compared to 35% in the last survey).

Also, 79% of respondents expect the unemployment rate to rise (up from 69%), reaffirming our expectation that the labour market will continue to loosen as firms shed human capital in a bid to cut costs amid tight credit conditions. The falling NZD did, however, support confidence in the export sector - 11% of those surveyed expect exports will improve in the year ahead, although this was down from 29% in the previous month.

On interest rates, 49% of respondents expect that the OCR will fall over the coming year. Our forecast calls for the RBNZ to cut the cash rate 100bp in December to 5.5%.

The Kiwi economy already has endured a technical recession, but downside risks to economic growth have become more acute, leading us to downgrade our GDP forecast to just 0.4% in 2009, from 0.8%. The prolonged recession we expect in New Zealand and the rising prospect that inflation will return to the RBNZ's target range more quickly than under our earlier forecasts, point to more assertive policy easing from the RBNZ. We expect the OCR to fall to 3.25% by end-2009.

ENDS

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