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Business confidence down. Long recession likelier

NZ business confidence down. Prolonged recession becoming more likely.

The NBNZ business confidence survey worsened slightly in July to -43.2 from -38.7 in June. The headline index suggests that a net 43.2% of respondents expect business conditions to deteriorate over the coming year. Had it not been for heightened speculation of an imminent interest rate cut, business confidence probably would have fallen further in July.

More importantly, the drop in firms' own activity expectations was sharp. The business activity index slumped to -8.2 in July from -4.0 previously. Only 16 negative readings in firms' own activity expectations, including this month, have been recorded over the last 20 years and, of these, according to the NBNZ, five "were right at the start of the survey in 1988, as the 1987 crash washed through." Corporate profitability continues to suffer amid high interest rates and tighter credit conditions, weighing on firms' own activity expectations. The chart below suggests that New Zealand's recession may be prolonged.

The greatest pessimism continued to be in commercial construction (-30%) and residential construction (-26%) in June, reflecting the sharp deterioration in the housing sector. The survey showed that 43% of respondents expect that prices will rise and 80% expect the unemployment rate to rise in the coming year; both measures were up from the previous survey. The survey also indicated that 17% of respondents expect that exports will increase, probably owing to the anticipated weakening of the NZ dollar, 4% expect their investments will fall, and a massive 27% expect profits to decline.

On interest rates, 42% of respondents expect that the OCR will fall over the coming year, compared to 35% previously. This is not surprising given that RBNZ Governor Alan Bollard last week cut the OCR 25bp from a record high 8.25%, and signaled that more rate cuts are likely. Our forecast calls for the RBNZ to cut interest rates by another 75bp this year, and by a further 125bp in 2009. Monetary easing should help support economic growth in the latter half of the year, helping to pull the struggling economy out of recession.

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