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Business Confidence Continues Upward Trend

Data Flash (New Zealand)

Result: Confidence rose from -2% (net respondents) to +16%, while firms' assessment of their own activity outlook improved from +28% to +39%. Implication for markets: In our view, the survey results have further raised the probability of a 25 bps RBNZ tightening in May.

Firms have remained significantly more confident about their own trading prospects (+39%, net respondents) than about the economy in general (+16%). Even allowing for usual seasonal variations that boost sentiment early in the year, a net 29% of firms assess their own activity outlook over the coming 12 months as positive, up from 27% in December.

The activity outlook series has historically been a good indicator of GDP growth going forward (see chart). Its current level suggests that the GDP growth cycle will bottom out at around 2.5% during 2002, significantly above the 1.5% included in the RBNZ's November forecasts.

Improved sentiment is also reflected in a further rise in investment and employment intentions, as well as profit expectations. However, expectations regarding exports and residential construction have fallen back to more realistic levels following significant increases in both series in the previous survey (see table below).

In line with improved sentiment and activity expectations, retailers' pricing intentions showed a further rise from +29% to +33%. This indicator had bottomed at 23% in November. The latest trend is consistent with our expectation that CPI inflation will remain well above 2% during this year.

We consider the upward trend in activity expectations to be consistent with our view that the economy will grow by around 3% this year, driven mainly by domestic demand. Despite the rise in the potential growth rate associated with the turnaround in migration flows, that suggests that capacity utilisation will remain high and the labour market relatively tight. As a result, we expect underlying inflation to remain above the mid-part of the 0-3% target range, suggesting that the RBNZ will need to return the OCR to, at least, `neutral' over the next 12 months. We expect the RBNZ to start its tightening cycle with a 25 bps move in May and return the OCR to 6.0% by early 2003, up from 4.75% currently.

Ulf Schoefisch, Chief Economist, New Zealand (64) 9 351 1375

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