ANZ survey shows business sentiment in negative territory for the first time since March 2011, and the worst it has been since March 2009

Business confidence fell sharply again in July, following a fall in June.

The data has been published in the ANZ business outlook survey.

Confidence in general economic conditions is now in negative territory.

However, firms see their own outlook much more positively.

Agriculture and construction are leading the decline in sentiment.

Today’s data will raise expectations that the RBNZ will continue cutting the OCR from here.

Here is what the ASB economics team made of this July data.

Implications

Business confidence fell further in July.  The economic outlook has deteriorated rapidly over the past few months.  We continue to expect at least two more rate cuts from the RBNZ, bringing the cash rate to 2.5%.  We see the risks to this outlook as skewed to the downside as inflation pressures remain muted.

Comment

Business confidence fell sharply again in July, as the fears for the economy became more widespread.  In July, the falls in general confidence spread to previously robust areas, such as retail and services.  Meanwhile, general confidence fell even further in agriculture and construction.  However, it should be noted these declines are largely around sentiment for the broader economy and often not reflective of actual activity. 

When looking at expectations for firms’ own outlook, which is a more accurate predictor of economic growth, retail and services remain robust, while manufacturing actually lifted.  Unsurprisingly, the sharpest decline in activity expectations has been in agriculture.  Construction intentions have also dropped sharply in the past two months, particularly in commercial which is concerning. 

The decline in the headline number is very dramatic, but it overstates the weakness which is actually present in the economy.  Nonetheless, there has been a decline in firms’ expectations for their own activity, which is consistent with a material slowdown in the economy – albeit not quite to recessionary levels.

The other word of caution – over July the NZD has dropped sharply along with interest rate expectations.  It’s likely the full impact of these moves have not been captured in July’s business confidence survey.  From August, we expect confidence to stabilise, and potentially start to improve.  After all, low interest rates and a low NZD will be very simulative for the NZ economy.

Over 2015, we expect economic growth to slow from the annual rate of 3% recorded at the end of 2014, down to a relatively subdued growth in the vicinity of 2-2.5%.  However, this will be a temporary dip, and (assuming the RBNZ does go through with at least two more rate cuts), from 2016 we expect a reacceleration in activity toward 3%.

The RBNZ delivered an interesting speech on Wednesday.  It appeared the RBNZ, while still wanting a lower NZD, was concerned about the market and analysts getting too ahead of themselves with OCR expectations.   However, we don’t think the market has got ahead of itself.  The outlook for interest rates can change quite quickly in a short space of time.  On the back of this latest fall in confidence the RBNZ needs to keep an open mind that an ‘extreme’ view of OCR cuts can quickly become the RBNZ’s base case – the RBNZ wasn’t contemplating cutting interest rates 6 months ago either.  We continue to expect at least two more rate cuts from the RBNZ, bringing the cash rate to 2.5%.  We see the risks to this outlook as skewed to the downside as inflation pressures remain muted.

For the record, we also don’t see a 2% cash rate as being consistent with recessionary levels as the RBNZ stated in Wednesday’s speech.  The relationship between growth, inflation and interest rates appears to have changed since the Global Financial Crisis.  It is entirely conceivable that a still-growing NZ economy reaches a 2% OCR if inflation pressures remain conspicuous with their absence. 

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