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Quarterly Survey of Business Opinion (QSBO)

Data Flash (New Zealand)

Quarterly Survey of Business Opinion (QSBO)

Key Points

* Business confidence fell sharply from +31 (net respondents) in Q4 to -2 in Q1. The decline in confidence was especially deep in the manufacturing sector (from +23 to -14) but all sectors surveyed recorded significant declines. Allowing for seasonal factors, confidence declined from +21 to -12.

* The fall in confidence occurred despite a net 45% of respondents expecting a decline in interest rates over the next 12 months (previously, a net 32% had expected an increase in interest rates).

* Of particularly significance to the RBNZ, the net proportion of respondents reporting an increase in selling prices over the past three months declined from + 33 to +16 - the lowest level reported since Q4 1999. Similarly, the net proportion expecting to raise prices over the next three months fell from +34 to +13. Amongst retailers, the net proportion of retailers expecting to raise prices declined from +44 to +30 (and a peak of +55 in Q3 2000)

* Cost expectations have moderated to a lesser extent than intentions regarding price increases. However, the implications for profitability did not seem to be borne out by the survey indicators of profitability, which were little changed from the previous reading.

* Indicators of firms' actual trading experience proved somewhat more robust than general business confidence, suggesting that the economy maintained a reasonable level of growth in the March quarter. For example, the level of trading conditions surveyed in Q1 is consistent with our estimate of GDP growth of around 0.6% qoq. Similiarly, capacity utilisation in the manufacturing and building sectors increased from 89.1% to 90.7%. Firms' expectations for trading activity in Q2 remain consistent with a continuation of a modest rate of economic growth.

* Despite much weaker business confidence, investment intentions declined by only a modest amount while employment intentions were little changed.

* The tightness of the labour market continued to be reflected in a further small rise in the skill shortage indicator, suggesting that upward pressure on wages remain.

Commentary

* Today's release, combined with declines in both the Colmar Brunton and TV3 polls of consumer confidence - suggest that sentiment has deteriorated very recently after holding firm through to mid-March. The decline in confidence likely reflects a number of factors, including greater media attention given to the extent of economic weakening in many of New Zealand's trading partners, the onset of drought conditions in some parts of New Zealand and a renewed weakening in the NZD.

* It is worth noting that, unlike the NBNZ survey, the QSBO does not cover the well-performing agriculture sector, suggesting a more comprehensive survey might have revealed a somewhat smaller decline in optimism. Moreover, indicators of actual activity remain much more robust than indicated by the confidence data. Retail, housing and employment indicators all suggest that the economy continues to grow at around its trend growth rate (which we assess as being no higher than 2.5% yoy).

* This suggests that economic weakness is more imagined than actual at this point. However, there remains a significant risk that weak expectations become self-fulfilling, especially if consumer confidence declines further in reaction to media reporting of today's QSBO release. Similar concerns helped to underpin the RBA's decision to ease official rates by 50bps last week.

* On balance, we think that the weakness in confidence will prove sufficient to prompt the RBNZ to take additional `insurance' and cut rates by a further 25bps when it reviews monetary policy settings on 19 April, taking the OCR to 6.0%. A 50bp cut cannot be completely ruled out if next week's CPI prints much weaker than expectations (RBNZ expects -0.1% qoq; market expects +0.1% qoq) thus verifying the decline in inflation pressure suggested by the QSBO pricing indicators. However, the RBNZ has the opportunity to cut rates further if needed just four weeks later on 16 May. Therefore, we don't see a 50bp cut as being that likely at this stage.

* Current market pricing is now consistent with a25bps cut in April. The prospect of further rate cuts will hinge crucially on the evolution of the data over coming weeks. At this stage we think a further 25bp cut is highly likely on 16 May, with a larger cut possible if a deterioration in short-term economic prospects is confirmed.

Darren Gibbs, Senior Economist, New Zealand,

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