NBNZ Business Survey (August 2001)
Data Flash (New Zealand)
General business confidence improved from +17% (net respondents) in July to +23% in August while firms' assessment of the outlook for their own trading prospects improved from +36% to +40%.
Adjusting for seasonal effects, confidence declined marginally from +27 to +25% while trading prospects were unchanged at +41 (the latter the highest level recorded since October 1999). However, the seasonal factors are volatile at this time of year and should be treated with a degree of caution.
As the chart below shows, the current level of the `own trading prospects' indicator remains consistent with economic growth of close to 4% over the next year - compared with the 2.5% to 3% growth forecast by both the RBNZ and us.
The remaining real economic activity indicators captured in the survey were, in general, little changed from July. Manufacturer's export intentions rose from +43% to +51% - the strongest result since last November -likely reflecting improved sentiment regarding the outlook for the Australian economy as well as seasonal factors. The outlook for commercial construction improved somewhat but that for residential construction eased. For the first time in seven months, on balance, respondents expect interest rates to rise over the next six months.
Pricing intentions were little changed from July but year-ahead inflation expectations ticked up 0.1pp to 2.9% - the first rise since last September. In our view these indicators remain at levels that suggest inflation outcomes in the top half of the RBNZ's 0-3% target range over the next 12 months at least.
The NBNZ survey supports our view that the New Zealand economy continues to weather the global downturn in good shape. We had expected a slightly less optimistic result this month, with concerns about the impact of the drought on electricity generation and pricing also expected to have impacted on confidence.
Following the RBNZ's `hawkish' August Monetary Policy Statement (MPS), the market priced out any chance of further easing in New Zealand - a move that we thought was premature at that time. However, over the past two weeks, the market has re-priced a slightly better than 50% chance of an easing at the 14 November MPS, largely on the back of a marked re-evaluation of interest rate prospects in Australia.
The near-term outlook for domestic demand appears robust and there are upside risks to inflation from an economy already operating at, if not beyond, full capacity. However, the global economy is stalling and, with each passing week, convincing signs of a recovery seem no closer. Moreover, with commodity prices beginning to decline and the NZD now strengthening, the two key factors that have mitigated the transmission of the global slowdown to the local economy are beginning to weaken (albeit modestly so far). This suggests some risk that the economy may not be able to sustain its recent good performance.
We think that probability of an easing in November is greater than the 30% chance we saw as likely in mid-August but, at this stage, still less than a 50/50 proposition. As previously noted, we think that the probability of a move in rates at the October interim review is low given the important domestic data that is due for release between the October and November reviews.
Next week's important US data (the NAPM and Employment Report) and the actions and rhetoric of the RBA will be important in driving market opinion regarding the next move in the New Zealand rates.