Quarterly Survey of Business Opinion

Data Flash (New Zealand) Quarterly Survey of Business Opinion (QSBO) - Q1 2002

Result: Business confidence rebounded from -10% (net respondents) to +23%, with a rebound in pricing intentions reflecting buoyant consumer demand.

Implication for markets: Fixed interest markets were marginally weaker in response to the survey. The probability of an acceleration of the RBNZ's tightening pace to 50 bps at 15 May Monetary Policy Statement has increased somewhat. However, we maintain our central view of 25 bps tightening steps on 17 April and 15 May.

Commentary

Today's business survey was entirely consistent with other economic data published over recent weeks, which has pointed to buoyant domestic demand. Furthermore, exporters have become more optimistic due to an improving global environment. However, the aggregate confidence level of business confidence may be somewhat overstated as the survey does not include the agricultural sector, which has experienced falling confidence on the back of falling global commodity prices. Furthermore, the sooner-than-expected tightening by the RBNZ is only partly reflected in the data.

Notwithstanding those qualifications, today's survey result was strong and the RBNZ will see it as further vindication of its decision to start the tightening cycle early. The Bank based that decision on the outlook for buoyant domestic demand, tight capacity and rising inflation pressure - exactly the situation reflected in the survey. It is surprising therefore that the debate about the tightening cycle seems to have shifted from the appropriate timing of the start of the cycle to the question of whether the RBNZ might have to become more aggressive. We believe that stepping up the pace of tightening would be inconsistent with a forward-looking approach to policy for the following reasons:

Recent retail sales data points to a high degree of debt financing of the increase in spending, which, by its nature, will be self-correcting. The reduction in farm incomes, mainly in the dairy industry, will slow demand in rural New Zealand, which has been a strong driver of aggregate consumer spending.

As the global environment improves, pressures from high net inward migration are likely to subside gradually.

Currently high pricing intentions by merchants reflect buoyant consumer demand, with pricing power expected to trend down in line with activity growth later this year.

The NZD has performed stronger than assumed by the RBNZ in its recent forecast, thereby helping to contain inflation pressure.

Given those trends and with the market already having priced a relatively aggressive tightening path (thereby implicitly doing the work for the RBNZ), there appears no need for the Bank to fuel the tightening sentiment by shifting from its signalled 25 bps step increases to 50 bps moves. Our central expectation remains that the OCR will be increased by 25 bps on both 17 April and 15 May.

The Data

The survey was conducted during the second half of March, with two thirds of the responses received prior to the 20 March Monetary Policy Statement. In line with positive economic data and an improving international outlook, business confidence improved from -10% (net respondents) in January to +23% in late March. In seasonally adjusted terms, confidence rose from -18% to +3%. Firms continue to be more upbeat about prospects for their own trading activity than about the economy more generally. A net 34% of surveyed businesses expect an improvement in trading prospects this quarter (up from 16% in the previous survey). Moreover, a net 13% (seas. adj.) experienced increased trading activity in Q1, consistent with other data that has pointed to solid GDP growth in the early part of this year.

Consistent with buoyant activity levels, capacity utilisation remained at an historically high level of 90.1%.

Intentions for plant and machinery investment recorded only a relatively modest increase from zero to +4%, which is consistent with actual investment activity being already at a high level by historical standards.

Similarly, employment intentions increased only modestly from +1% to +5%. The merchant sector is planning the strongest increase in employment, in line with buoyant retail demand.

The skill shortages indicator deteriorated modestly after a surprisingly large improvement last quarter. The reading of +32% (net number of firms finding it more difficult to find skilled labour) is still the second lowest over the past two years and is consistent with a stabilisation of wage inflation at around current levels.

In line with buoyant domestic demand, pricing intentions have risen significantly from +18% to +32%. While the manufacturing sector recorded a fall, this was offset by a particularly strong increase in the services sector. While pricing intentions have risen, cost expectations have remained unchanged at +23%. That is consistent with the continued rise in profitability expectations from +8% to +13%.

Ulf Schoefisch, Chief Economist, New Zealand

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