NZ business confidence at lowest level since last recession, raising chance of rate cut

Tuesday, 5 April 2016

While the construction sector has a strong pipeline of work ahead, rising costs are expected to hit profitability in 2016.

The odds of an early interest rate cut are climbing, after a leading survey showed business confidence at the lowest level since New Zealand was last in recession.

On Tuesday the Quarterly Survey of Business Opinion (QSBO) showed that a net six per cent of businesses expected a pick up in their own activity in the coming months, down from 20 per cent in January.

Seen by economists as the most accurate guide to upcoming economic output, the own activity level was at the lowest level since March 2011, which official figures showed was at a time when New Zealand's economy contracted over two quarters.

The net figures represent the difference between those expecting activity to pick up and those expecting a deterioration.

* Reserve Bank cuts key rate to 2.25 per cent, more to come**

The survey, run by the New Zealand Institute of Economic Research (NZIER), does not question any farmers, which other business confidence surveys have highlighted as the most pessimistic part of the economy.

The Reserve Bank cut the official cash rate in March to 2.25 per cent, an all time low, and most economists expect a further one or two cuts before Christmas.

While most expect the cut will not come before June, Tuesday's release stoked expectations that Governor Graeme Wheeler may opt to lower the benchmark rate to 2 per cent at the next review on April 28.

Cameron Bagrie, chief economist at ANZ, said the April decision was now 'live'.

'Low inflation (and inflation expectations) and signs of receding growth are not a good combo for the [Reserve Bank],' Bagrie said, with the survey pointing to growth in the coming months 'well below trend'.

ASB senior economist Jane Turner said the survey built the case for the Reserve Bank acting 'sooner rather than later' by lowering the OCR, but pointed out that most of the respondents submitted their surveys before the March 10 meeting, when Wheeler delivered a surprise cut.

'As such the [Reserve Bank] may feel it has already played its part in delivering prompt action.'

Overall confidence in the economy was weaker in the first three months of the year. Asked how they expected the general economy to perform in the coming months, a net 1 per cent said they expected conditions to deteriorate.

'A key driver of this gloominess is that firms have consistently had their expectations of a pick-up in sales dashed in reality,' NZIER senior economist Christina Leung said.

The survey pointed to companies facing dual pressures, with increasing costs, but the inability to pass these on to customers.

In the first three months of the year, a net 26 per cent said they had faced price increases, while a net 5 per cent cut the prices charged to customers.

The proportion expecting to face price increases in the coming months was a net 26 per cent.

While 11 per cent of businesses expected to pass on price increases to customers, NZIER said the number who actually managed to pass on increases had consistently come in below those which said they were going to.

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