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Data Flash (New Zealand NZ Survey

We have just published the following research which is attached as a pdf file;

Data Flash (New Zealand) NZ Quarterly Survey of Business Opinion - DecQ 1999

Key Points

The survey recorded a small rebound in business confidence from +18 to +21 (net respondents). That level is consistent with an annual GDP growth rate of 4% during 2000.

Responses to questions about December quarter performance were consistent with our GDP forecast for Q4 of around 1% qoq. Smoothing through the volatility in June and September quarter GDP (-0.3% and +2.3% respectively), the demand and production momentum appears to have been maintained across the board. That is consistent with other indicators and partial December quarter data received so far.

The significant rise in manufacturing and building sector activity has led to the strongest quarterly rise in capacity utilisation in those sectors since 1983 - from 88.9% to 90.8%. The capacity variable has recently moved up on the list of key indicators watched by the RBNZ.

Consistent with tighter capacity levels, - a net 31% of businesses also reported difficulties in finding skilled staff, up from 24% three months ago; and - the net share of respondents reporting price increases over the past 3 months has risen from +3% to +12%.

The labour market indicators are pointing towards a quarterly rise in employment of 0.7% or higher in Q4 1999.

With respect to the next 3 months, the survey showed - the expectation of some consolidation after an acceleration in growth rates during H2/99; - comparatively modest investment and employment intentions; and - a net 27% of businesses intending to raise selling prices (up from +23%), which is a reflection of an anticipated further significant rise in costs (from +8% to +22%).

Commentary

The latest business survey provides further evidence that there was a strong economic rationale for the RBNZ's increase of the official cash rate last week - despite the somewhat unfortunate timing.

In the light of - a continued solid growth performance of around 4%, - a surprisingly rapid rise in capacity utilisation, and - pricing intentions at the same level as at the top of the last cycle in 1994/95, it is difficult to argue that there is little evidence of inflation pressure in the NZ economy. The Q4 CPI has been the only piece of information that could suggest the contrary, although a closer look at the data revealed that around two thirds of the inflation surprise can be attributed to transitory factors.

At the same time, the lagged correlation between capacity utilisation and pricing intentions on the one hand and the CPI on the other suggests that actual data will soon begin to reflect what the indicators have shown for some time (see charts on page 1 of this note).

As a result, the RBNZ will be justified in remaining cautious with respect to giving `new paradigm arguments' too much weight at this stage. With the NZD showing renewed weakness, the Bank is likely to become increasingly concerned about the fact that the cash rate is still significantly below the 6.0-6.25% level that is widely considered `neutral' - at a time when capacity indicators are suggesting that the output gap has closed late last year.

While our central forecast remains for a further 25 bps rise in the cash rate on 15 March and further steps of the same size in April and May, NZD weakness continues to shift the risk distribution surrounding this outlook to the upside.

ENDS

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