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Data Flash (New Zealand) NBNZ Business Survey

Data Flash (New Zealand) NBNZ Business Survey - May 2000

Key facts

General business confidence suffered the largest one-month fall in the 12 year history of the survey. A net 21% of respondents expect general business conditions to deteriorate over the next 12 months. In April, a net 15% of firms expected an improvement in business conditions.

Firms' expectations about their own level of activity remained positive, with a net 19% expecting an improvement over the next 12 months. However, in April, a net 37% of respondents had expected an improvement in their own activity levels.

Optimism regarding prospects for exports fell, but remains at high levels. Investment intentions have fallen to their lowest level since October 1998 but have remained marginally positive. The number of firms expecting to reduce employment exceeded those expecting to increase employment for the first time since October 1998.

The net proportion of businesses intending to raise prices over coming months fell slightly, but remains at very high levels. A net 25% of firms expect to increase prices, compared with 28% in the April survey. Expectations for CPI inflation over the next year stood at 2.5%.

May-00 Apr-00 Mar-00 Business Confidence -20.8 +14.8 +27 Activity Outlook +18.8 +36.6 +37 Exports +36.9 +45.0 +40 Investment +6.7 +15.8 +16 Capacity Utilisation +13.2 +29.3 +30 Profits +4.2 +18.9 +21 Pricing Intentions +24.8 +27.9 +30 Inflation Expectations +2.5 +2.6 +2.5

Source: DB Global Markets Research, NBNZ

Commentary

The latest NBNZ survey continues the run of survey evidence pointing to a widespread decline in business confidence. The fall in confidence likely reflects a number of factors, including significant concerns about several aspects of government policy (in particular, the Employment Relations Bill) and, to a lesser extent, actual and projected rises in interest rates. The survey was conducted prior to the RBNZ's latest 50bp rise in the OCR and the subsequent decline in the NZD. This suggests that the June survey - which will be released just a week prior to the RBNZ's 5 July OCR review - may record a further fall in confidence. However this may be mitigated if the Government continues to signal its willingness to address business concerns regarding the more alarming aspects of the Employment Relations Bill.

Firms' view of their own activity outlook - followed more closely by the RBNZ - remains substantially more optimistic than general business confidence. However, this indicator has also fallen over the past month, and now stands at levels more consistent with GDP growth of around 2% over the next year, rather than the 3.5% growth anticipated by the RBNZ. However, pressures on inflation remain. The significant fall in the NZD since the survey was taken is likely to be reflected in a rise in pricing intentions in the June survey.

Looking ahead to the July OCR review, the Bank faces a difficult decision. On the one hand, price indicators are likely to prove much stronger than the Bank expected in May. Export and import price data for Q1 (due 9 June) is likely to show very much stronger inflation pressures than the Bank allowed for in its forecasts, while the TWI is currently sitting more than 8% below the level assumed by the Bank to prevail over H2/2000. On any reasonable estimate of pass-through, this suggests significant additional pressure on inflation over the next year or so and argues for a 25bp rate hike on 5 July. On the other hand, there is genuine uncertainty about the near-term outlook for the economy, with the balance of risks suggesting weaker growth than the Bank expected in May. This points to lower inflation pressures further out. As a result, the Bank could decide to leave the OCR unchanged in July pending a full reassessment of the economic outlook in the August MPS (including an assessment of whether the near-term deterioration in inflation could be expected to spill over into medium-term price setting behaviour).

On balance, we still expect the Bank to move in July but we acknowledge that it is a fine decision. Further weak activity data over coming weeks could shift this balance towards no change (estimates of May dwelling permits and retail sales will be published on 17 and 20 June respectively, May overseas trade is due 27 June, and the June NBNZ survey is due end-June).

Darren Gibbs, Senior Economist, New Zealand (64) 9 351 1376

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