NZIER's QSBO shows confidence fell to 3 yr low in June quarter; dairy regions hardest hit; retailer confidence dives; Inflation indicators at 6 yr low; NZIER sees rate cuts in July, Sept

By Bernard Hickey

The New Zealand Institute of Economic Research’s (NZIER) Quarterly Survey of Business Opinion (QSBO) found confidence fell to its lowest level in three years in the June quarter.

Confidence in the dairy-connected regions of Waikato, Southland and Canterbury fell the most, but retailer confidence also dived after sales failed to live up to expectations in the March quarter, NZIER reported.

NZIER said the survey suggested annual growth in the year to June of 2.6% and it now expected the Reserve Bank to cut the Official Cash Rate by 25 basis points in each of the July 23 and September 10 decisions, with the possibility of a further cut on October 29.

Inflation expectations in the survey dropped to their lowest levels since early 2009.

The Reserve Bank watches the survey closely and signalled in June after its first rate cut that further cuts may be needed if demand weakened and inflation expectations remained low.

The New Zealand dollar dropped slightly to around 66.7 USc after the release of the survey in mid-morning trade.

NZIER’s seasonally adjusted measure of firms’ expectations of an improved general business situation in the next quarter fell to a net 7% in June from a net 20% in the March quarter. The survey’s measure of firms’ expectations of their own business activity in the next quarter fell to a seasonally adjusted 13% in June from 26% in the March quarter.

The net percentage of firms employing extra staff in the June quarter fell to 11% from 15% in the previous quarter.

The net percentage of firms able to increase their prices fell to a net 1% from a net 6%. This was the lowest level since early 2009, although the level of capacity utilisation, a measure closely watched by the Reserve Bank, rose to a record-high 93.4%. NZIER said the higher capacity utilisation reflected higher building activity.

NZIER Senior Economist Christina Leung said retailers were particularly downbeat.

“After a disappointing Christmas season, retailers continue to pare back sales expectations,” Leung said, adding that difficulty in passing on costs was affecting profitability.

Even confidence in Auckland fell to a three year low, albeit at much higher levels than the rest of the country. A net 18% of businesses in Auckland were confident about their own business outlooks, down from a net 27% in the March quarter.

Leung said there were no indications yet of a fall into a recession. “We’re seeing a moderation of growth,” she said.

Economist reaction

ASB Senior Economist Jane Turner said she expected the weak business confidence and inflation to lead to three more OCR cuts by October 29.

“Indicators of inflation pressures remain very subdued, further reinforcing the case for further rate cuts from the RBNZ,” Turner said. “While cost pressures are lifting slightly, firms are largely absorbing this increase with few reporting an increase in selling prices over Q2,” she said.

Westpac Senior Economist Satish Ranchod said the survey added to a range of indicators pointing to a loss of momentum in the economy through mid-2015.

“With lingering softness in inflation and signs that activity is moderating, we expect that the RBNZ will cut rates again at its upcoming July policy meeting,” he said.

ANZ Chief Economist Cameron Bagrie said the QSBO’s results were similar in tone to ANZ’s own Business Outlook survey, with warnings of weak profitability and high capacity utilisation a feature.

“This will have the RBNZ scratching its head, as are we. There is a sense that there could be a real margin squeeze story across the economy in the coming year,” Bagrie said.

Political reaction

Labour Leader Andrew Little said the signs of a staggering economy could not be ignored.

“John Key and National have been complacent and squandered the opportunities they had to diversify the economy through a period of good growth. Now is not the time for back sliding and spin, the Government has to take responsibility and support businesses and workers through these headwinds,” Little said.

“It is worrying that the Government has become so distracted with political obsessions like the state house sell-off and a frivolous flag referendum that they have let the economy slide,” he said.

(Updated with more detail, reaction)