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Quarterly Survey of Business Opinion (NZIER) - Q1

Data Flash (New Zealand)

Quarterly Survey of Business Opinion (NZIER) - Q1 2000

Survey period: 21 March - 3 April Responses: 449

Key Points

Actual trading conditions in Q1 consolidated near the high level reached in late 1999.

However, business confidence (regarding the outlook for the next six months) has fallen from +21 to +3 (net respondents). That is in contrast to the NBNZ survey taken in early March, which recorded a rise in confidence.

The strongest contributors to the downturn in QSBO confidence were building/construction sector companies, which is consistent with weakness in latest actual data.

The smallest drop (from +20 to +12) was recorded for merchants, consistent with retail sales having held up well during Q1.

In contrast to the fall in confidence, the indicator of 'trading activity expected by businesses over the next three months' remained at a level consistent with a consolidation of the annual growth rate at around 4%.

Manufacturers have become more confident about export prospects, while merchants have become a little more cautious about the outlook for domestic sales. Builders have become increasingly pessimistic regarding their near-term prospects.

Capacity utilisation in the manufacturing and building sectors consolidated at the high level reached late last year: up only 0.02% to 90.79%. That level is the highest since the 1994 boom.

Consistent with high capacity usage, investment intentions have risen, with a strong upturn for manufacturers partly offset by a weaker outlook for the construction sector.

The labour shortage indicator has also stabilised at the late 1999 level. Consistent with rising commodity prices and interest rates, the question regarding changes in costs over the past three months has produced the highest reading since the mid-90s.

Furthermore, cost expectations for the next three months have reached the highest level since the late 1980s.

Consistent with tight capacity and rising costs, average selling price expectations have risen to highs not seen during the low inflation environment of the 1990s.

Merchants, which are the most relevant group for assessing CPI trends, have the highest price rise expectations.

Commentary

Despite the fall in overall confidence, firms have remained positive about their own performance. Most indicators clearly suggest that, despite the easing in confidence, the economy is continuing to grow - albeit not at the brisk pace of H2/99. That is consistent with our assessment that - after annualised growth of more than 9% in H2/99 - the economy will settle at a growth rate of around 4% in 2000.

It could be argued that the downturn in confidence highlights risks to the growth track further out. That makes the diversion between the QSBO and NBNZ confidence measures a key factor to watch. We expect the QSBO confidence indicator to turn up again over the next quarter - in line with continued high consumer confidence, cost relief from weaker oil prices, as well as the significant stimulus provided to the economy through a low exchange rate and rising commodity prices.

While the real economy outlook implied by this survey is broadly consistent with the RBNZ's growth forecasts published in March, the continued firming of pricing intentions and the lack of a downward correction in capacity utilisation following its jump in Q4 is likely to be of concern to the Bank. These two variables have had a reasonable correlation with actual inflation developments in the past (see charts below) and are at levels consistent with inflation heading towards 2.5% during this year. Together with the Bank's significant underestimation of Q4 GDP growth and import prices, as well as a slightly higher-than-expected March quarter CPI, that provides a strong case for an upward revision of the RBNZ's medium- term inflation forecasts. Consistent with that, we expect a 25 bps tightening move on Wednesday. Given that the cash rate is still below neutral, the international equity market weakness is unlikely to play a significant role in the RBNZ's rate hike decisions at this stage.

Ulf Schoefisch, Chief Economist, New Zealand,

This, along with an extensive range of other publications, is available on our web site http://research.gm.db.com

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