Business confidence drops on the back of 3 rate rises

NZPA

Tuesday 10th July 2007

Business confidence fell to a year low, but companies' stretched resources and planned price rises showed enough inflationary pressure to worry the Reserve Bank, economists said.

A net 37% of companies expected business conditions to worsen in the next six months, according to the NZ Institute of Economic Research's Quarterly Survey of Business Opinion, more than the net 15% pessimists in the March quarter.

Seasonally adjusted, a net 13% of companies expected their own activity to improve, down slightly from 17% in the previous survey.

The survey captured the Reserve Bank's two latest interest rate rises totalling 50 basis points, but was taken when the New Zealand dollar was at US75c. The currency has since risen above US78c.

"Confidence and some of the indicators are at least heading in the right direction, though with resource pressures showing an economy that is still stretched, the Reserve Bank will remain on alert," ANZ economists said.

Companies expecting to increase prices in the next three months fell to a net 35%, from 40%. However, those which had already increased prices in the past quarter were steady at a net 25%, from 27% in the March quarter.

Capacity utilisation -- showing the extent to which companies use their installed productive capacity -- eased slightly to 91.6 in the quarter, after rising to 91.8 in the previous survey.

More companies found it difficult to hire skilled and unskilled staff, and more companies saw profits fall -- a net 21% from 17%. In an effort to cut costs, fewer planned investment in buildings, plant and machinery.

Confidence declined across the board, with less regional variation than in previous surveys.

ASB economist Daniel Wills said the survey did not change his forecast of no rate rise from the central bank this month as a result of the survey, and was sticking with a 33% chance of a further rise this year.

"The NZD is sitting above the RBNZ's forecast assumptions and there are further early warning signs the housing market is slowing, both factors that should offset the added strength of dairy prices since the June MPS," Wills said.

However, Citigroup economist Annette Beacher said the drop in headline confidence was the only weak aspect of the survey, exacerbated by rising interest and exchange rates and the introduction of compulsory Kiwisaver superannuation payments.

"We remain of the view that the `leading edge of a slowdown' is not enough for the RBNZ to stop this tightening cycle in the face of the overwhelming terms of trade stimulus.

"We cannot rule out another tightening to 8.25% in the coming months," Beacher said.

The New Zealand dollar eased after the survey was released, retreating below US78c.

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