Business Confidence Slightly Improved

Business Confidence Slightly Improved

·        Business confidence improved marginally
·        Firms’ own activity expectations worsened
·        RBNZ to deliver further cuts to OCR

The NBNZ business confidence survey improved marginally in March to a reading of -39.3 (J.P.Morgan -40) from -41.2 in February. The headline suggests that 39.3% of respondents expect business conditions to deteriorate in the coming year. The more important reading of firms’ own activity expectations worsened, however, falling to -21.2 from -20.1, just shy of the record low -21.5 recorded in December; this result points to sharply weaker economic growth (chart). On our forecast, the New Zealand economy, will contract for at least six straight quarters (four of which already have been recorded).

Confidence deteriorated significantly in the construction sector from extremely low levels. Nearly a third of those surveyed in the commercial and residential construction sectors expect that conditions will worsen over the next 12 months. In addition, the survey showed that 19% of respondents expect their investments will fall and 41% expect profits will decline – these results, though, were much in line with the previous month’s survey.

Reaffirming our expectation that unemployment will rise further, and significantly, 86% of respondents expect the jobless rate to rise in the coming year and 28% expect to shed workers. The weaker NZD failed to provide much support to those surveyed in export-orientated sectors, with fewer businesses optimistic about the export outlook, with just 2% expecting exports to rise.

Recent RBNZ verbiage appeared to lead some respondents to rein in expectations of further OCR cuts. Only 55% of those surveyed expect that the OCR will fall over the coming year, down from 69% in February and 82% in December. In our view, easing inflation expectations, the falling terms of trade, deteriorating conditions offshore, and falling asset prices, provide ample scope for the RBNZ to continue easing policy assertively. The Kiwi economy was well entrenched in recession a long time before international conditions deteriorated sharply and, with rates still at 3%, the RBNZ has plenty of policy ammunition in reserve. That said, Governor Bollard has hinted that future rate cuts will be much smaller than those recently delivered; thus, we look for 25bp rate cuts in April and June.

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