Business confidence weakens

Business confidence weakens; RBNZ to cut OCR 100bp next month

•    NBNZ business confidence worsened in February
•    Firms’ own activity expectations improved slightly
•    RBNZ to cut OCR 100bp in March

The NBNZ business confidence survey worsened to -41.2 in February, falling from -35.0 in December. There was no survey conducted in January. The headline reading suggested that a net 41.2% of respondents expect business conditions to worsen in the coming year.

The more important reading of firms’ own activity expectations, however, rose to -18.6 after collapsing to -22, which was a record low. Despite the improvement, this measure of sentiment is at extremely low levels, and points to sharply weaker economic growth in coming quarters (chart).

Confidence remained extremely weak in the commercial (-29%) and residential (-17%) construction sectors, despite marking a slight improvement. In nearly all other sectors and areas surveyed, business confidence deteriorated. The survey showed that 15% of respondents expect their investments will fall in the coming year, 41% expect profits will decline, and 15% expect that prices will rise. Reaffirming our expectation that the labour market will continue to loosen, 87% of respondents expect the unemployment rate to rise and 29% expect to shed workers in the coming year. The weaker NZD failed to provide much support to those surveyed in export-orientated sectors. Fewer businesses surveyed in the export sector were optimistic about the outlook, with 4% expecting exports to rise in the coming year, compared to 9% previously.

On interest rates, 69% of respondents expect that the OCR will fall over the coming year, down from 82% previously. The survey also showed a moderation in inflation expectations from 3.15 in December to 2.68 in February. Easing inflation expectations, the problematic global economic and financial market outlook, sagging domestic house prices, and the falling terms of trade, provide ample scope for the RBNZ to continue easing policy assertively. We recently changed our forecast to include a 100bp cut to the cash rate in March and a terminal cash rate of 2%, with downside risks. In our view, the cash rate may fall below 2% if the global economic outlook deteriorates even further and/or the significant fiscal and monetary policy stimulus being delivered fails to have a substantial impact on domestic demand before year-end.

ENDS

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