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NZIER confirms 'double-dip' recession fears

Tuesday 5th October 2010

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The risk of a double dip recession is rising as firms across New Zealand report a much weaker September quarter than expected, and a slump in activity and profit expectations through to the end of the year, the New Zealand Institute of Economic Research reported this morning.

"The risk of a double dip recession has risen quite a bit," said principal economist Shamubeel Eaqub at the release of the September Quarterly Survey of Business Opinion. 

Asked of the likelihood, Eaqub said: "I don't know...50/50?"

After contracting 4% the June survey, firms's experienced activity fell a further 15% in the September survey, while seasonally adjusted business confidence fell from a net 26% of respondents positive in June to 9% net pessimistic in September, the first such negative in a year. 

Expectations through the end of the year, while a generally less reliable indicator, also slumped, from a net positive 15% in June for the September quarter, to a net negative 2% for the December quarter. 

The survey did not pick up the impact of the Canterbury earthquake and came before the Reserve Bank's decision to hold the Official Cash Rate unchanged last month. 

"The result was synchronised across regions, sectors, and firm size," said Eaqub.

"Construction and financial services slowed most sharply. Manufacturing exports were steady at barely positive." 

Profitability was on the slide again, and while capacity utilisation was holding up at 88.9% (90.3% in June), along with hiring intentions, firms had little pricing power, with lack of demand the key issue. 

"It makes you wonder how sustainable the recovery will be."

There had been a "massive spike" in inventories, largely because construction materials firms appeared to have made fewer export sales than anticipated, while the local building sector was in "free fall".

"Retail was not as bad as I'd feared," Eaqub said. 

The consistent experience in recent quarters has been for firms to move from positive to neutral, rather than the dynamics usually seen in an economic recovery, where increasingly positive expectations are the norm.  

Profits and lending growth would be the drivers of recovery, but weak profits and subdued lending growth indicated "we will be pretty hard-pressed to having an investment-led recovery here".

It was possible the December quarter would be stronger, if spending in Canterbury on earthquake repairs began to kick in.

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