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NZ business confidence rises in June, economy remains weak

Monday 30th June 2008

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New Zealand business confidence rose in June though companies are still gloomy about their own prospects, according to National Bank’s Business Outlook survey.

A net 39% of those surveyed expect worse times in the next 12 months – that’s an improvement from May, when a net 50% expected worsening conditions. Still, a net 4% expect tougher times ahead for their own business, the fourth negative reading in as many months and the weakest stretch since 1988.

New Zealand’s economy, which shrank in the first quarter, is “navigating through three shocks at once”: a housing slump, global credit squeeze and soaring prices for food, fuel and raw materials, the bank said. It predicts two or three cuts in interest rates by the central bank before year-end, though any reductions may be curbed by inflationary pressure.

“June business sentiment improved but activity expectations remained depressed,” said Shamubeel Eaqub, director of Australia & New Zealand investment research at Goldman Sachs JBWere (NZ) Ltd, after the survey was released.

Weak activity would be consistent with a 0.3% contraction in GDP in the second quarter, a technical recession, he said.

A net 41% of firms expect to raise prices, the highest reading in eight years, according to National Bank’s survey.

“There is a limit as to how far monetary policy reflation can go in a world of inflation,” National Bank’s Business Outlook said.

Crude oil rose to a record $142.99 a barrel this week, driving up fuel costs worldwide. Prices also have jumped for corn.

Employment intentions fell, with a net 11.9% of firms anticipating a reduction in workers. Lower interest rates later in the year no doubt helped.

“Unfortunately, it is firms' own activity outlook that more accurately dictates economic prospects, something that is backed up by worsening employment and investment intentions,” Robin Clements, senior economist at UBS New Zealand.

Investment intentions deteriorated, with a net 3% expecting a decline, National Bank said.

Glimmer of hope

Still, chief economist Cameron Bagrie said there are signs of light at the end of the tunnel.

“We are in no doubt that the seeds of an upswing and the all important realignment in the composition of growth are very slowly being sown,” he said in a statement. The New Zealand dollar is starting to correct, fiscal policy is delivering impetus via tax cuts and the central bank has moved to an easing bias, he said.

Reserve Bank Governor Alan Bollard this month said economic activity is weakening enough to bring inflation back within the bank’s 1%-to-3% target band in the medium term after peaking at a forecast 4.7% in the September quarter.

By Jonathan Underhill

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