NZ business confidence improved markedly in April

New Zealand business confidence improved markedly in April

*Business confidence improved markedly in April

*Firms’ own activity expectations also jumped

*RBNZ to cut OCR 50bp to 2.5% on Thursday

The NBNZ business confidence survey improved markedly in April, rising to a still dismal -14.5 from -39.3 in March. The headline indicated that “only” 14.5% of respondents expect business conditions to deteriorate in the coming year, a surprising and, in our view, unwarranted improvement from the average 39% recorded over the last six months. The reading of firms’ own activity expectations also jumped higher, rising to -3.8 from -21.2, which suggests that growth in 2Q may not contract as we forecast (chart). This we find difficult to fathom. On our forecasts, the New Zealand economy will contract for at least another two quarters, having already contracted throughout 2008.

The improvement in confidence was broad based, although those surveyed in the commercial construction sector remained very pessimistic about the outlook, with 36% expecting conditions to worsen over the next 12 months. Marking a significant turnaround, 10% of those surveyed in the residential construction sector expect that conditions will improve, possibly owing to mild signs of stabilization in the housing market. REINZ reported that home sales rose 28%m/m in March, and median prices were up 1.5%, owing to a rush of people taking advantage of lower interest rates.

In other areas, the survey showed that 12% of respondents expect their investments will fall, 30% expect profits will decline, 77% of respondents expect the jobless rate to rise, and 19% expect to shed workers – all significant improvements on the previous month. Further, despite the recent rise in NZD, more businesses were optimistic about the export outlook, with 10% expecting exports would rise, compared to 2% previously.

The largest shift in sentiment was with respect to the interest rate outlook. For the third straight month, respondents reined in their expectations of further cuts to the official cash rate (OCR). Only 2% of those surveyed in April expect that the OCR will fall over the coming year, down sharply from 55% in the last survey. 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. That said, even though economic conditions warrant a larger move, we forecast “only” a 50bp cut to the OCR on Thursday.

There is little risk of a larger move, though, given that Dr. Bollard has made clear that any future rate cuts will be smaller than those recently delivered. We believe the statement accompanying the OCR decision tomorrow will be decisively dovish, and reiterate that rates will be low for an extended period and that the door is open to further policy easing if necessary.

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ENDS

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