Quarterly Survey of Business Opinion (Q2 2002)
Data Flash (New Zealand)
Quarterly Survey of Business Opinion (QSBO - Q2 2002)
Headline business confidence dipped into negative territory, but rose modestly in seasonally adjusted terms. Trading activity was robust in Q2 and is expected to remain so in Q3. Pricing intentions eased a little.
Implication for markets: We continue to expect a 25bp rate hike on 14 August but this is now close to a 50/50 call. If the RBNZ does not hike in August, there is a better than even chance of no further rate hikes this year.
The fall in headline business confidence suggested by today's QSBO had already been signalled by the monthly NBNZ survey. QSBO confidence actually rose slightly between late March and late June when seasonal factors are taken into account - a conclusion also supported by the NBNZ survey. However, the NBNZ survey suggests that confidence peaked in May, with confidence declining in seasonally adjusted terms in June for the first month since last October. In our view, this represents a more accurate picture of the recent trend in sentiment. At -2% (net respondents), QSBO confidence was a little weaker than we had expected given the -7% reading on the last NBNZ survey (the QSBO does not directly survey the agriculture sector, which has experienced a very sharp fall in confidence on the back of slumping commodity prices and the stronger NZD). This may point to an even weaker NBNZ survey when the next reading is released in late July.
Although general confidence is low, we think this is indicative of concerns about how the New Zealand economy may perform in 2003 (concerns we share), rather than how it is performing at present. Indeed, the level of most indicators of recent activity in the survey remain at very healthy levels, as one would of expect for an economy that, on our estimates, has expanded by an above trend 2% over the first half of 2002. We expect growth to moderate somewhat over H2 2002 to around trend levels (0.7-0.8% qoq). The various forward indicators contained in the QSBO survey leave us quite comfortable with this view.
Looking ahead to the next RBNZ meeting on 14 August, we continue to pencil in a further 25bps hike, taking the cash rate to what the Bank regards as a broadly neutral 6%. However, given the ongoing slump in US equities (which we think most likely has much further to run) and the risk this poses to the US and global recovery, and with recent data suggesting that the risk of an ongoing acceleration of domestic demand is receding (not that we ever thought this was likely), the likelihood of a 14 August rate hike is declining, and in our view is now close to a 50/50 call. In particular, we think a no-move verdict by the RBA in early August could prove decisive should that occur (although our central expectation is that the RBA will hike). Moreover, we think that if the Bank does not hike on 14 August, there is a better than even chance that no further rate hikes will take place this year, especially with foreshadowed post-Election changes to the RBNZ's Policy Targets Agreement likely to undermine the case for tighter near-term monetary settings.
The key survey indicators are set out in the table below. Between late March and late June, headline business confidence fell to -2% (net respondents) from +23%. In seasonally adjusted terms, confidence rose to +9% from +3%. However, other surveys suggest that confidence peaked in May.
Firms continue to be more upbeat about prospects for their own trading activity than about the economy more generally. A net 23% of surveyed businesses reported improved trading activity over Q2 (consistent with our estimate that the economy expanded at a brisk pace);
Furthermore, a net 24% expect an improvement in trading activity during Q3. That said, we suspect that this may prove a little too optimistic - we note that in the previous survey, a net 34% had expected improved trading activity in Q2, compared with the realised outcome of +23%.
Consistent with buoyant activity levels, capacity utilisation remains at a historically high level of 90.6% (and rose between in Q1 and Q2 in seasonally adjusted terms).
Intentions for plant and machinery investment recorded an increase to +9% from +4%, which is consistent with actual investment activity being already at a high level by historical standards.
Similarly, employment intentions increased to +9% from +5% - the highest level reported since 1995. The service sector is planning the strongest increase in employment.
The skill shortages indicator deteriorated to +39% from +33% (net number of firms finding it more difficult to find skilled labour). This places it closer to the levels that have prevailed over most of the past two years.
Cost expectations have fallen sharply, to +10% from +23% - the lowest level of cost pressure reported since Q3 1999. In large part this probably reflects the impact of the strengthening NZD.
Pricing intentions have declined to a lesser extent, to +26% from +32%, largely reflecting sharp declines in pricing intentions in the retail and building sectors. However, the proportion of respondents expecting to raise prices remains at above-average levels, consistent with an economy with has very little spare capacity and is experiencing generally buoyant domestic demand conditions. That is also consistent with the continued rise in profitability expectations to +14% from +13%.
Darren Gibbs, Senior Economist, New Zealand
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