NZ: Business confidence bounces back to highs

NZ: Business confidence bounces back to previous highs

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The headline reading on the NBNZ business confidence index recovered almost all of the previous month’s fall in April, rising to 49.5 from 42.5 in March (J.P. Morgan 44.0). At current levels, the survey indicates that almost 75% of Kiwi firms expect an improvement in general business conditions. We had anticipated a rise in the headline confidence index, owing to fewer global financial jitters over the survey period, although today’s result was a significant upside surprise. Clearly, buoyant global growth (and particularly demand conditions in the Asian region), are boosting the export outlook for New Zealand firms. Confidence now is back near decade highs, though with sovereign uncertainties overseas continuing to escalate, we recognize that this improvement may be short-lived.

Of more direct significance to the domestic economy’s prospects, the all-important firms’ own activity outlook index also posted an outsized gain in April, moving up to 43.0 from 38.6. According to the NBNZ, the improvement in confidence over the month was relatively broad-based across sectors. While we have noted the marked softening in the domestic data of late, the significant lag on the official data releases in New Zealand means the informational value in today’s confidence numbers should not be discounted. In particular, the construction sector registered the largest gain of any group, which, at face value, indicates a better outlook for that sector than does the weak building approvals data registered so far this year. Similarly, the bounce in the agricultural sector, particularly the improvement in the ‘livestock’ component, implies that drought conditions may have eased somewhat.

Elsewhere in today’s report, a net 34.5% of firms expect stronger export volumes over the year ahead, which is an improvement of 10%-points from last month’s release. Also, a net 10% expect to increase investment, and, even more importantly, a net 13% expect to be hiring staff over the year ahead, which is a 4-year high for the latter component.

The good news in this report notwithstanding, it has few implications for our view on growth and on monetary policy. The improvement in firms’ own activity registered over the last year already appears sufficient for a further improvement in GDP growth, and as such is already embedded in our forecasts. After a dismal 2009, in which GDP declined 1.6%, we expect the Kiwi economy to garner momentum over the year, growing 2.8% in 2010. On the RBNZ, we have emphasized for some time that Governor Bollard wants hard evidence of an entrenched recovery before shifting to tighter policy. As such, today’s survey evidence will be less relevant than the official data prints on retail sales, credit card spending and of course GDP – which, hopefully, convey the same message - that will follow over the next month or so.

Indeed, given that the recovery underway in New Zealand shed some momentum early this year, we expect the RBNZ to be on hold at tomorrow’s meeting, and that it will kick off the tightening cycle with a 25bp hike in July. The central bank will be reluctant to leave rates low for too long, especially given that today’s report indicates a net 26% of firms plan to increase prices over the year ahead. Tomorrow’s meeting will be noteworthy, however, due to what we anticipate will be a change in the official language. We expect that the current guidance for policy stimulus to be removed “around the middle of 2010” will be withdrawn, in order to give officials more flexibility in forming an appropriate policy response to the data flow.

ENDS

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