Firms Still Optimistic About Their Own Prospects
Data Flash (New Zealand)
NZ: Firms Still Optimistic About Their Own Prospects
The May NBNZ business survey recorded a fall in general business confidence from +17% (net respondents) to +4%. Adjusting for seasonal effects, confidence moderated from +20% to +11%.
However, firms' assessment of prospects for their own activity remains robust. In headline terms, the proportion of firms optimistic about their own outlook fell from +37% to +31. After adjusting for seasonal effects, optimism declined by just 1pt from last month to 34% - little different to the level that has prevailed since the beginning of this year.
As the chart below shows, the current level of the `own activity' indicator is consistent with economic growth of a little over 3% over the next year - still somewhat stronger than the 2.3% growth that we expect over the year to March 2002, but perhaps marginally weaker than the 3.5% growth expected by the RBNZ. The remaining real economic activity indicators captured in the survey were little changed from the previous month's levels. Investment and employment intentions were just a few points weaker. However, export intentions were a little stronger and expectations of residential building activity rose from +11% to +20% (no doubt influenced by a strong bounce in house sales and building consents in April, together with lower interest rates).
Pricing intentions and inflation expectations moderated only marginally and are still at levels that suggest outcomes in the top half of the RBNZ's 0-3% target range over the next 12 months.
The decline in headline confidence was a little greater than we expected. However, the continued robustness of firms' own activity expectations was in line with our expectations.
We think that the negative media commentary provided by the National Bank in connection with this survey is unnecessarily negative and risks a return to the doom and gloom commentary that undermined consumer sentiment in mid 2000. In particular, their negative interpretation of the economy ignores the following recent positive indicators:
The NBNZ survey's `own activity' indicator remains consistent with a level of GDP growth that exceeds our assessment of the economy's current potential growth rate (around 2.5% yoy). The median market expectation for growth in Q1 is 0.8% qoq.
The volume of retail sales rose 1.4% qoq in Q1. Indicators suggest that robust growth has carried through to April at least.
The number of house sales in April was 24% higher than a year earlier and the median house price has begun to show modest growth. Similarly, the number of dwelling consents issued in April, while remaining at comparatively low levels, rose 6.5% mom to the highest level since last July.
The level of job advertising remains consistent with continued employment growth.
Despite a weak real exchange rate that makes imports very expensive, overall import demand has shown no signs of falling despite a reduction in capital spending (from the record high levels seen in 2000).
While the domestic economy is certainly not booming, in our view it is showing clear signs of responding to strong income growth, robust levels of consumer confidence and lower interest rates. The apparent moderation in the net migrant outflow, if sustained, also removes a negative influence on the housing market. We think the latest NBNZ survey will have had little impact on the RBNZ's thinking (the market displayed no reaction either), with US data due at the end of this week of far greater significance for monetary policy. Our central view remains for no further rate cuts in New Zealand, but we would not rule out one further 25bps cut - most likely in August, rather than at the 4 July interim OCR review.