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Business confidence improves; recession may linger

Tuesday 7th October 2008

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New Zealand business confidence improved in the third quarter as the central bank slashed borrowing costs to alleviate a recession that threatens to linger through 2008.

A net 19% of companies expect the economy to deteriorate in the next six months, better than the net 64% who saw worsening times ahead in the second quarter, according to the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion.

The economy is mired in its first recession since 1998 and some analysts predict a second wave of impact in job losses as companies adjust to a drop in demand. A net 23% of companies surveyed expect profits to fall in the next three months, an improvement from the net 44% who expected weaker earnings in the previous survey.

"The survey adds to our view that the economy is indeed in a deepening and broadening recession," said Shamubeel Eaqub, economist at Goldman Sachs JBWere. "We do not anticipate a sustained recovery until late 2009," he said.

A recovery next year would still need to be assisted by further cuts to interest rates and the stabilisation of credit markets and is at risk should trading conditions deteriorate in New Zealand's main export markets, he said.

New Zealand's dollar fell as low as 61.70 US cents overnight and has retreated from more than 81 cents early this year. A deteriorating economic outlook and lower interest rates are undermining support for the currency.

The Reserve Bank is expected to cut the official cash rate by 50 basis points to 7% this month, and continue lowering rates through 2008. The NZIER said indicators of domestic trading activity in its latest survey suggest gross domestic product shrank in the third quarter and is likely to contract in the fourth quarter as well.

On a seasonally adjusted basis, a net 32% of firms reported a decline in their own activity, the poorest response since March 1991, according to the survey.

Helping soothe the central bank, inflationary expectations have eased, according to the survey, with increased pricing intentions retreating to 28% from 49%.

The economy contracted 0.2% in the second quarter and shrank 0.3% in the first.

By Jonathan Underhill

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