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NBNZ Business Survey (September)

Data Flash (New Zealand)

NBNZ Business Survey (September)

Key facts

Following two months of declining pessimism, the weight of negative news over the past month has caused a small setback in general business confidence. A net 20% of respondents are now pessimistic about the general business outlook, up from a net 14% in August. This has occurred despite interest rate expectations reaching their lowest level in over a year.

Nonetheless, a net 16% of respondents are optimistic about the outlook for their own business, unchanged from the level of optimism reported in August. Within that total, the agricultural sector has become slightly less optimistic than last month while the construction sector is no longer pessimistic.

Optimism regarding exports has also improved sharply. A net 46% of firms are optimistic about the outlook for export volumes, while a net 60% of manufacturers are optimistic. These are the most positive responses reported since November 1999.

Most other indicators of activity have remained broadly stable. A net 6% of firms expect to reduce employment over the next six months, compared with a net 5% in August. A net 6% of respondents expect to boost investment over the next six months, compared with a net 7% in August. A net 5% of respondents expect profits to decline over the next six months, down from a net 3% in August.

Further weakness in the NZD has caused a sharp increase in inflation expectations. Year-ahead inflation expectations jumped sharply to 3.1%, up from 2.7% in August. This is the highest level reported since January 1992. A net 44% of firms expect to raise prices over the next six months, up from a net 29% in August. Amongst retailers, a net 70% expect to raise prices, up from a net 47% in August. These are by far the highest levels reported in the history of the survey.

Commentary

As regards the real economy, the latest survey provided little surprise. We had anticipated a small setback in general business confidence over the past month as a result of continued weakening in the exchange rate (seen by many people as a barometer of the state of the economy) and further petrol price rises. We are encouraged that firms' expectations of their own level of activity have held up at last month's levels. We are especially encouraged to see a sharp increase in optimism regarding exports. At least over the near-term, the prospects for expansion in the economy will depend largely on the performance of the external sector. Today's survey result makes us optimistic that the export sector is up to the task in hand. Going forward, following tomorrow's Q2 GDP release, which we expect to reveal a 0.8% qoq contraction in the economy, we think that the worst real economy data will be behind us. We expect confidence and activity levels to have resumed their gradual improvement when the next survey is published at the end of October (helped by the stabilisation of the NZD). The subdued real economy is not matched, however, by subdued inflation pressures. The pricing measures from the latest survey give some cause for concern. The immediate inflation pressures facing the economy do not stem from excess demand in domestic goods and labour markets - they stem from a downward shock to the exchange rate and rising world commodity prices. The shock is highly transparent. Therefore we think there is some risk that price rises stemming from the shock will be more readily accepted at each stage of production and distribution than we have become accustomed to over recent years. The prospect of a strong recovery in the economy during 2001 exacerbates the risk that the first round impact of the weak exchange rate and high oil prices will give rise to second round effects on a broader range of prices in the economy, including wages. This leads us to remain pessimistic on the outlook for inflation - not just this year, but next year and the year after that. Our bearish inflation outlook leads us to expect further monetary tightening. With the domestic economy flat and actual inflation measures relatively subdued, we do not expect the RBNZ to hike rates on 4 October. The next opportunity for the Bank to hike rates is the 6 December Monetary Policy Statement. At present, we favour a 25bp rate hike on that date, although real economy and confidence data may continue to be sufficiently weak to convince the Bank to hold off until early next year. Barring a sharp appreciation of the NZD - which at present seems unlikely - we would be very surprised if the OCR is not at least 25bps higher than at present by the March Monetary Policy Statement. Indeed, a very high Q4 CPI (published in mid January) could be the catalyst for an even sharper move.

Darren Gibbs, Senior Economist

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