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Firms' own activity outlook continues to improve

Australia Economic Research
New Zealand: firms' own activity outlook continues to improve

The headline reading on the NBNZ business confidence survey fell in December from 43.4 to 38.5, marking the third straight monthly decline. We had expected a modest rise in the headline given that, since the last NBNZ survey, the domestic economic data have been mildly positive. News from offshore also has been generally more upbeat, with the US non-farm payrolls report, in particular, showing an unexpected drop in the US unemployment rate and “only” a small drop in non-farm payrolls.

The all important firms’ own activity outlook improved in December, however, rising to 36.9 from 33.7. This supports our view that the Kiwi economy will continue to expand in coming quarters (chart).

Despite the weaker reading on the headline measure of business confidence, the details of the survey appeared mildly more upbeat. A larger portion of those surveyed expected that investment (a net 10%) and profits (a net 16%) would improve. The employment outlook also was looking better, with a net 6% of those surveyed expecting employment to increase over the next 12 months, and “only” 29% expecting the unemployment rate to rise. Even the outlook for the construction sector is looking up (finally), with a net 63% of those surveyed expecting residential construction to pick up over the next year, and a net 25% expecting some improvement in commercial construction.

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The survey also showed that 69% of firms expect the RBNZ to hike the cash rate in the next year, compared to 73% in November. This was a little surprising given the RBNZ shifted to a tightening bias, from an implied neutral stance, at the last OCR announcement in early December. Indeed, following the OCR statement earlier this month, we changed our OCR call. We now expect the RBNZ to kick-off the next tightening cycle in March with a 25bp rate hike. Previously, we expected that the RBNZ would delay the first rate hike until July 2010 and start with a 50bp move but, given the earlier start, a 25bp move should suffice. Financial conditions also have tightened, owing to stronger NZD, increased long-term interest rates, and elevated bank funding costs, which is doing some of the heavy lifting for the RBNZ.


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