NBNZ Business Survey - April 2001

Data Flash (New Zealand)

NBNZ Business Survey - April 2001

Business sentiment holds up suprisingly well

Key points

The latest NBNZ business survey recorded a fall in headline confidence from +30% (net respondents) in March to +17%. However, like most economic data, confidence indicators are affected by seasonal factors. Adjusting for seasonal effects, confidence moderated from +25% to +22%.

This result contrasts starkly with the recent Quarterly Survey of Business Opinion (QSBO), which showed a 33pt drop in seasonally adjusted confidence to -12%. The NBNZ survey was taken around the middle of April, two weeks after the QSBO.

Firms' assessment of prospects for their own activity provides further evidence of relatively upbeat sentiment. In actual terms this measure fell from +41% to +37. However, after seasonal adjustment, the index rose 1pt from last month to 36% - the highest level recorded for 12 months. The current level of the `own activity prospects' series is consistent with economic growth of between 3 to 4% over the next year (see chart above).

Most of the other real economic activity indicators captured in the survey remained at the previous month's levels: investment and employment intentions confirm continued expansion plans, supported by a relatively good profit performance.

Reflecting continued negative global economic news, export prospects declined 6 points to +31, but the level of the index remains very high, at least in part reflecting the offsetting impact of a very stimulatory exchange rate. Pricing intentions and inflation expectations moderated only marginally and are still at levels that suggest significant further price pressure over the next 12 months.

Comment

Today's confidence data confirms our view that there is considerable underlying strength in the domestic economy. If anything, the survey's `own activity prospects' indicator points to stronger growth - around 3 to 4 percent - than we would expect over the coming year. A growth figure of that magnitude would cause the RBNZ to become somewhat uncomfortable, considering the already high level of capacity utilisation in the economy, slow growth in potential GDP, as well as persistent core inflation pressure. While annual CPI inflation dropped significantly in Q1, this was largely driven by one-off factors and the core measures are still trending far above the RBNZ's 1-2% comfort range.

Considering those inflation trends and very loose monetary conditions, the Bank's rate cuts in March and April reflected the overriding concern about the lagged global influence on domestic activity prospects. In particular, the RBNZ was concerned with the successive downward revisions in Consensus forecasts for New Zealand's major trading partners. Following the surprisingly strong Q1 GDP figure in the US, that trend is likely to come to a halt or even reverse, making further RBNZ rate cuts more difficult to justify.

While the Bank indicated after the April move that the market should not automatically expect further rate cuts, we still believe that the RBNZ will cut once more. Another 25 bps move is expected for 16 May, although we would now put the probability of such a move no higher than 60%.

Ulf Schoefisch, Chief Economist, New Zealand

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