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Deutsche Bank: NZ Confidence Edges Back Slightly

Data Flash (New Zealand)

NBNZ Survey: Confidence Edges Back Slightly

Key Points

The NBNZ business confidence index edged back slightly in December, with a net +21% of respondents expecting conditions to improve over the next twelve months. Consistent with the general deterioration in sentiment, respondents' expectations for their own activity, exports, investment, profits and employment moved lower over the month.

On the inflation front, pricing intentions remained unchanged, while inflation expectations moved sharply higher. In particular, a net 24% of respondents now expect to raise prices, while annual inflation expectations moved up to 2.6%.

:::::::::::::::::::::::::Dec-99:::::Nov-99:::::Oct-99

Business Confidence::::: +21::::: +25::::: +17

Activity Outlook::::: +35::::: +42::::: +39

Exports::::::::::::::: +38::::: +46::::: +45

Investment:::::::::::::::+11::::: +18::::: +16

Capacity Utilisation:::::+23::::: +28::::: +29

Profits::::::::::::::: +17::::: +24::::: +21

Pricing Intentions::::: +24::::: +24::::: +21

Inflation Expectations 2.6::::: 2.3::::: 2.2

Source: DB Global Markets Research, BNZ

Commentary

Despite the decline in confidence for the month, sentiment remains at levels consistent with an on-going recovery in activity over the December quarter. On a sectoral basis, the sharpest fall in confidence was recorded in the manufacturing sector, which is likely to reflect the increased cost of conducting business (the re-nationalising of the work place insurance scheme, the proposed repeal of the ECA & higher personal taxes) following the election of a Labour/Alliance government. For the RBNZ, the most significant feature of this survey is likely to be the sharp rise in year-ahead inflation expectations, which have now moved to their highest level since June 1997. The recent trend increase in this series suggests that expectations are responding rapidly to actual pricing developments and casts some doubt about the RBNZ's assessment that inflation expectations are well anchored at low levels. Nevertheless, despite the pick-up in inflation expectations, a sharp projected rise in Q3 GDP (released 23 December) and the recent weakness in the NZD, we expect the Bank to leave the OCR unchanged at their 19 January review, but to instead move the cash rate by +50bp at the 15 March MPS.

ENDS

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