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A lack of business confidence will cause RBNZ cuts

A lack of business confidence will cause cuts. RBNZ are likely to hit 50bps.


Key Points

• Business Confidence deteriorates along with profitability. Poor pricing intentions has cut inflation expectations. Businesses are worried.”

• RBNZ action has failed to spark the fire needed under business intentions. More work is required.

• The protracted, and worsening, malaise amongst business, is likely to induce another RBNZ response. We now expect another 50bps cut(s) to just 0.5%. And we wouldn’t rule out a 50bp in November. But it is the Government that must step up.

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Summary

The focus this week is all business, and confidence is crumbling. Businesses have highlighted weak demand, capacity constraints, (Govt) policy uncertainty, and poor pricing power as reasons to worry about profitability, reduce investment intentions, and lower inflation expectations. All of the above point to growth running at or around 1%, half the current run rate, and a third of what we need. The deterioration in business intentions demands a policy response. We will get a monetary policy response, but what we really need is a fiscal policy response. The Government continues to lie in wait through fear of breaking fiscal responsibility rules, that have proven irresponsible. So, we must expect the RBNZ to do more, with diminishing returns.

We now expect the RBNZ to cut to just 0.5%, and we see a good chance the bank delivers in just one move in November. The risk of another move, as bank capital requirements bite, to 0.25% is uncomfortably high, and will hurt savers.

The release of both the ANZ Business Outlook survey for September and NZIER’s QSBO for Q3, have disappointed. Both surveys were weak, and worsening. The surveys differ in their respective respondent groups, but unsurprisingly they are telling us the same thing. Firms are in a dispirited mood. Headline business confidence continues to linger around lows last seen during the GFC. But more concerning has been Firms’ outlook for their own activity, a leading indicator of GDP growth. The outlook for activity has continued to deteriorate. Both surveys show more firms than not anticipate falling activity into 2020. For the RBNZ, the forecast pickup in growth over the second half of 2019 may not materialise. Also, firms’ pricing intentions and inflation expectations are falling. A further policy response is likely to be needed to ensure inflation is on track to return to the RBNZ’s 2% target mid-point. We expect the RBNZ to cut the OCR by a 25bps to 0.75% in November. There is now a risk, of course, that the RBNZ delivers a 50bp move to 0.5% in November.

NZ business have gone from worrying about policy uncertainty following the last general election, to worrying about weakness in general conditions. Firms are now slowly losing the enthusiasm to hire and invest. Moreover, there is an inability among firms to pass on rising costs to their customers, and this has hammered profitability. Cost increases have come from policy change, such as the large hikes to the minimum wage, but also from capacity constraints and difficulty finding suitable staff – especially in the building industry.

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