Quarterly Survey of Business Opinion June 2000

Data Flash (New Zealand)

Quarterly Survey of Business Opinion June 2000

Key Points

The survey was conducted during the period 20-30 June, with 85% of responses received during the third week of June.

Actual trading conditions in Q2 weakened significantly, consistent with our estimate of only a modest 0.2% qoq increase in GDP.

Capacity utilisation in the manufacturing and building sectors moderated from 90.5% in late March to 89.9% in late June.

Similar to other surveys, business confidence (regarding the outlook for the next six months) has fallen significantly from +6 to -42 (net respondents). The degree of negative sentiment is relatively similar in all sectors of the economy. [Please note that the agriculture sector is not part of the survey.]

In contrast to the low level of confidence, the indicator of 'trading activity expected by businesses over the next three months' recorded a value of -1. That differential is similar to the gap between confidence and the expected outlook for businesses' own activity in the NBNZ survey.

Consistent with the drop in confidence and trading activity, investment and employment intentions have fallen.

A net 33% of businesses experience rising costs over the past quarter, which is the highest level recorded over the past decade. Further cost pressure is expected for the next quarter.

Pricing intention have not moved up to the same degree, reflecting a weak trading environment. The resulting weak profitability outlook is likely to have been a key factor behind the fall in confidence.

Commentary We see this survey as evidence that business confidence is gradually recovering from its lows in late May and early June. While sentiment in this survey - sampled mainly during the third week of June - was as negative as during the 1998 recession, it was not as negative as in the monthly NBNZ survey, which had been sampled 1-2 weeks earlier. Taking average historical differences between the two surveys into account, the QSBO confidence level corresponds to a level of around -30 in the NBNZ survey. While still weak, that is a significant improvement from the -56 recorded by the NBNZ in early June.

We expect confidence to keep improving further as buoyant activity in the export sector gradually filters through to the domestic sector. Furthermore, while the business community may never become comfortable with the policies of the left-of-centre Government, the excessive negativism is likely to gradually disappear.

The turning point in business confidence over the past month appears to have coincided with a slight recovery in consumer confidence, as indicated by responses to the question about the economic outlook in the latest Colmar-Brunton poll of households.

Improving confidence data confirms our view that the weakness in the economic is temporary, with reasonable growth prospects for coming years. It appears that this view is shared by the RBNZ.

Given the RBNZ's positive outlook on growth, the inflation related data in this confidence survey will have provided little reason for comfort. While capacity utilisation has fallen somewhat, it is still above the average level recorded over the past decade. Furthermore, cost pressure remains high and is likely to be passed through as soon as trading activity improves.

In summary, given gradually recovering business confidence, high capacity utilisation, and continued strong cost pressure, we see this survey as confirmation that there is a considerable risk that the forthcoming inflation spike will translate into more generalised CPI inflation next year. That suggests that further increases in the overnight cash rate should be expected, beginning with a 25 bps move on 16 August.

QSBO
(net % of respondents)
::::::::::::::: June 00:::::Mar 00:::: Dec 00:::::Sep 00
::::::::::::::::::::
Confidence::::: -42:::::::::: 6::::: 21::::: 18
Expected::::: -1::::::::::19::::: 21::::: 27
Activity
Skill Shortages -33::::::::::-32::::: -31::::: 24
Investment::::: -13:::::::::: 11::::: 2::::::::::5
Intentions
Employment::::: -11:::::::::: 0::::: 1::::::::::4
Intentions
Cost:::::::::: 37:::::::::: 31::::: 22::::: 8
Expectations
Pricing::::::::::31:::::::::: 35::::: 27::::: 23
Intentions
Capacity::::: 89.9::::::::::90.5::::: 90.8::::: 88.9
utilisation
(level)

Source: DB Global markets
Research, NZIER

Ulf Schoefisch, Chief Economist, New Zealand,

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