NBNZ Business Survey - June 2002
Data Flash (New Zealand)
Result: Business confidence is now declining under the weight of rising interest rates, an appreciating exchange rate, sharply lower commodity prices and increasing uncertainty about the pace of the global recovery. Indicators of pricing intentions are also declining.
Implication for markets: Although we expect a strong Q1 GDP outcome later today, the deterioration in these forward-looking indicators adds further to the argument for a cautious approach to further tightening. We now see a 40% chance that the RBNZ leaves the OCR unchanged at next week's OCR review. We continue to think that the OCR will peak at 6.25%.
The broad picture of the economy painted by the latest survey is a little weaker than last month. For the first time since November, general business confidence has declined in seasonally adjusted terms, falling 5% to +9.1%. This is 12 points short of the historic average. However, at this stage, firms' confidence in their own outlook has declined only modestly, by 1% to 39%, and remains 9 points above its historic average. In our view, the survey suggests that the economy's recent underlying growth momentum has been broadly in line with its current (migrant-inflated) growth potential of 3.25-3.5% yoy. Going forward, we worry that firms' may be unduly optimistic about their ability to withstand the less positive (albeit still reasonable) broader economic outlook that they now foresee.
As far as inflation indicators are concerned, year-ahead inflation expectations were unchanged this month at 2.9% qoq (this measure tends to follow actual developments in inflation). However, pricing intentions have continued to moderate, with a substantial decline recorded in pricing intentions in the retail and manufacturing sectors (in our view, this reflects the appreciating NZD). Most measures of `core' or `underlying' inflation suggest that near-term inflation momentum remains more consistent with inflation outcomes nearer the top of the 0-3% target range than the middle. As we have noted before, these measures continue to be tainted by numerous factors that can be more closely linked to external price influences, regulatory changes and structural reform in particular markets, rather than clear evidence of excess demand (inflation in the housing sector remains the obvious exception). In any case, the Finance Minister has made it clear this week that he is broadly indifferent to inflation outcomes within the 0-3% target range.
Ahead of the Q1 GDP release (due shortly), we still think that a hawkish RBNZ will raise the OCR by 25bps at next week's OCR review. However, today's NBNZ data, together with ongoing global concerns, the strengthening NZD, falling commodity prices and, at the margin, criticism of the Bank's handling of monetary policy by the Finance Minister, mean that we now think that the risk of no move is around 40%. With the market fully pricing a 25bps move, we continue to recommend long bill-strip positions. We continue to see the cash rate peaking at 6.25%.
General business confidence fell to -7% (net optimism) in June from +7% in May. Confidence has continued to plummet in the agriculture sector (to -50%). All sectors reported a decline this month. After adjusting for seasonal effects (respondents tend to be more optimistic during the summer months), we think confidence fell +9% from +14% last month. However, given unstable seasonal factors, the month on month change in the seasonally adjusted series should be interpreted with a degree of caution.
Firms remain more confident about their own activity outlook than about the economy more generally. A net 33% expect an improvement in their own business activity, down 6% compared with last month. After adjusting for seasonal factors, confidence fell to +39% from +40%.
Most other real economy indicators have deteriorated this month. While intentions to invest in plant and machinery rose slightly re unchanged, expected residential construction has eased. Profit expectations, employment intentions, and export intentions all declined (the latter by less than might have been expected).
Retailers' pricing intentions eased slightly to +25 from +29 last month - the lowest level recorded since November. At current levels, pricing intentions suggest that CPI inflation will trend back towards 2% over the next year or so. Economy-wide pricing intentions fell to +16 from +20 last month, with a substantial fall in pricing intentions also recorded in the agriculture and manufacturing sectors, and a more modest decline in the construction sector. Year-ahead inflation expectations were unchanged at 2.9%.
Darren Gibbs, Senior Economist, New Zealand