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Rate-cut expectations brought forward on dwindling business confidence

Tuesday 2nd April 2019

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Souring business confidence has several economists now expecting a rate cut by the Reserve Bank as early as May.

Last Wednesday, the central bank surprised markets when it changed its language to say it now expects to cut the official cash rate from its already record low 1.75 percent. That triggered a slide in the kiwi dollar and pushed down swap rates and government bond yields. 

While some economists, such as ANZ Bank New Zealand chief economist Sharon Zollner, had been anticipating a reduction amid emerging signs of an economic slowdown, most others saw potential inflationary pressures emerging from an increasingly tight labour market. 

However, today's quarterly survey of business opinion from the New Zealand Institute of Economic Research - seen as a key input in the Reserve Bank's projections - has local economists convinced that the OCR is heading lower. 

A seasonally adjusted net 27 percent of firms surveyed in the QSBO expect economic conditions to deteriorate over the coming months compared with the 18 percent that had expected a deterioration in the prior quarter. 

Critically, only a net 7 percent of respondents expect their own business activity will pick up in the next three months, down from 16 percent three months ago. A net 1 percent experienced contracting activity in the March quarter versus a net 4 percent that saw an improvement in the December quarter. 

"The fall in business confidence is a crushing blow. RBNZ rate cuts are coming," said Kiwibank chief economist Jarrod Kerr.

"The fall in business confidence is concerning. Uncertainty kills confidence. No confidence kills growth," he said. Kiwibank is expecting a rate cut in May followed by a second cut in June or August.

"The risk thereafter is that 1.25 percent is not the low."

Reserve Bank governor Adrian Orr cited the weaker global economic outlook and reduced momentum in domestic spending for his new bias, which will be the starting point for the central bank's new decision-making committee.

In the February monetary policy statement, the Reserve Bank's downside forecast projected a more substantial global slowdown than anticipated as needing the OCR to be 50 basis points lower at 1.25 percent by mid-2020. Under that scenario, annual GDP growth would slow to 2.2 percent in the March 2020 quarter. 

However, today's QSBO survey suggested the economy's pace of expansion could slow to below 2 percent in the first half of this year. The last time New Zealand's rolling annual growth figure was below 2 percent was in the December quarter of 2011. 

The QSBO survey was weaker than ASB Bank had expected.

"Businesses reported that activity over 1Q was weaker than over 4Q and this indicator is consistent with quarterly GDP growth of just 0.4 percent. We now expect the RBNZ to cut the OCR 25 basis points in May, followed by a second cut in August," ASB Bank senior economist Jane Turner said.   

ANZ's Zollner was more cautious.

"In terms of our August OCR cut call, today’s release skews the balance of risks towards an earlier cut rather than later. However, improvement in some global indicators provides some offset for now," she said. 

Zollner notes several key data releases lie between now and May, such as first-quarter inflation and jobs data and "a decent disappointment in any of them could result in a cut as soon as May. Not to mention the lengthy list of global risks that could spur the RBNZ into action a little sooner."

Bank of New Zealand head of research Stephen Toplis, who has been more hawkish, said he was millimetres away from formally moving his rate call to a cut "not because we think it is justified by economic fundamentals but because it is hard to stand in the way of the freight train that is market pricing with the RBNZ guiding the locomotive from the cab."

He also said he would wait for the CPI and jobs data before making the call. 

(BusinessDesk)

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