NBNZ Business Survey - October 2001

Data Flash (New Zealand)
NBNZ Business Survey - October 2001

Key Points

Business confidence has plunged since the terror attacks in the US on 11 September. A net 19% of respondents now expect a deterioration in general business conditions. In the September survey, a net 13% had expected improved conditions. In seasonally adjusted terms, the fall in confidence is a little less pronounced. However, the seasonal factors for this series are unstable and should be treated with caution.

Firms' expectations regarding their own trading prospects, while still positive, have also declined dramatically, with just a net 18% of respondents now expecting improved trading conditions, down from 39% last month. This level of optimism is consistent with 2% annual GDP growth over the coming year. We are currently updating and GDP projections. Our preliminary analysis indicates that GDP growth of 1% will prove closer to the mark, suggesting that this indicator will fall further in subsequent surveys.

Consistent with the much bleaker economic outlook, the various other real activity indicators contained in the survey are uniformly weaker, with investment intentions (especially commercial construction), profit expectations and employment intentions all down sharply. While a net 35% of manufacturers expect export sales to increase, this is the lowest level of confidence recorded since the Asian crisis.

While overall pricing intentions moderated further, retailers pricing intentions were little changed with a net 29% expecting to raise prices over the next six months. This probably reflects the renewed weakness of the NZD. Year-ahead inflation expectations fell to 2.8% from 2.9% last month.

Commentary

The latest NBNZ survey confirms the change of mood depicted in the earlier QSBO business survey. The fall in the firms' expectations of their own trading prospects was broadly in line with our expectations.

We are currently in the process of updating our quarterly economic forecasts. The latest NBNZ survey fits well with the view that we are developing. Indeed, we think that next month's survey may well show further deterioration. Our provisional forecast for GDP sees growth remaining well below trend over the next 12 months with some risk that either the current quarter, or perhaps Q1 next year, is flat or negative.

Over recent weeks, our view has been that the RBNZ would cut the OCR by 25bps on 14 November with a fair chance of a 50bps cut (35% probability). Over this time, the market has moved from pricing only a small chance of a 50bps cut to now pricing a 100% chance of a 50bps cut. This reflects the continued run of poor global data and, increasingly, emerging evidence of a weakening in domestic prospects.

The accumulation of negative data and the view emerging as we revise our economic forecasts means that we now believe that a 50bps cut is now the most likely outcome on 14 November (70% probability). This would take the OCR to 4.75%. A fuller explanation of our rationale for a 50bps cut is set out in a separate note.

While not our central view at this stage, our bias is that the OCR could fall further early next year if the emerging data - both globally and domestically - remains poor, with little sign of light at the end of the tunnel.

Given continued aggressive easing by central banks globally, and a developing view in the market that New Zealand's economic good luck is about to end, over coming months the market may well begin to flirt with an OCR as low as 4.0% following the Monetary Policy Statement scheduled for 20 March.

Darren Gibbs, Senior Economist

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