Business confidence weakens

Thursday 31st July 2008

New Zealand business confidence sank this month, with companies negative about their own activity for a fifth straight month, suggesting an economic slump in the first half may take longer to end.

A net 43% of companies expect worse times in the year ahead, widening from 38% in the previous month, according to National Bank's Business Outlook survey.

"It's a sea of red ink across retailing, manufacturing, construction and services," Cameron Bagrie, chief economist at National Bank, said in the report. "Our composite growth indicator from the survey is not only negative, it is telling us the economy is firmly in contraction mode."

New Zealand's economy probably shrank in the first half as higher costs for food, fuel and credit sapped consumer confidence and squeezed profit margins. Central bank Governor Alan Bollard said he may follow this month's interest rate cut with more reductions as the weaker economy eases pressure on resources.

The survey reinforces the view that "there will be a series of rate cuts to come," said Robin Clements, senior economist at UBS New Zealand. "While the debate now is about how fast easing will proceed and how far it will go, our view remains that the RBNZ will cut by 25 basis points at each opportunity until the OCR reaches 6.75% in March next year," he said.

A net 8% of companies expect conditions for own business will get worse in the next 12 months, marking the first five-month stretch of negativity since the survey began in 1988.

Only export expectations improved, to 16.5% from 14.5%, probably helped by a weakening kiwi dollar. The currency fell to 73.44 US cents today from more than 80 cents in March.

Expectations for profits deteriorated, with a net 27% expecting dwindling earnings, from 18.9% in the previous month.

Still, a net 43% expect to raise prices, up from 41.2% in June. Bollard this month said further cuts to the official cash rate (OCR) depend on inflation abating as expected from the 5% peak he predicts for the September quarter.

Employment intentions receded to a negative 13.6% from 11.9%.

By Jonathan Underhill

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