NZ business optimism falters; investment, hiring intentions dim

Monday 28th June 2010

New Zealand business optimism has faded over the past two months as deteriorating global sentiment dented the outlook for the local economy and sapped firms’ intentions to take on new staff and make investments.

Headline confidence declined to a net 40% of companies surveyed expecting business conditions to improve in the coming year, down from a net 48% last month, according to the National Bank Business Outlook. Fewer firms expect to lift their investment, with a net 10% of respondents looking to inject more capital into their businesses, down from a net 14% last month, while a net 13% of companies will look to hire new staff this year, compared to a net 16% in May.

“Firms seem to be taking a cautionary view in terms of how the flow-on from the global scene could pan out,” said Khoon Goh, senior markets economist, in his report. “A sustained pick-up in investment remains the missing ingredient for a broadening of the recovery, and critical component of expanding productive capacity.”

The survey period covered the government’s cut to the company tax rate and Fonterra's announcement for an increased pay-out to farmers next season. It also encompassed worldwide jitters over Europe’s sovereign debt crisis, which sapped investors’ appetite for so-called risky assets and pushed stock markets lower.

Still, Goh said export intentions was encouraging, with regional difficulties in Europe having little impact, as a net 30% of respondents predict their export receipts will gain over the next year, compared to a net 33% in May.

Reserve Bank Governor Alan Bollard was heartened by the pick-up in exports, saying strong demand in Asia, coupled with resilient prices for raw materials, had supported the country’s economic recovery. He hiked the official cash rate a quarter-point earlier this month to 2.75%, the first increase in three years, and a net 78% of firms expect interest rates to climb in the next 12 months.

New Zealand’s economy grew 0.6% in the first three months this year, while the current account deficit shrank to a 21-year low 2.4% of gross domestic product, according to government data.

Businesses pared back their expectations for their own activity, which fell 6.7 percentage points to a net 38.5%, while companies expecting bigger profits fell to a net 19% from 24% in May.

Companies expect inflation to rise to 3.1% over the next year, compared to 2.69% last month, after the government announced it would hike the goods and services tax to 15%. A net 39% of firms intend to lift their prices this year, compared to a net 28% in May.

Goh said the GST increase is “clearly behind these movements and should not unduly alarm the Reserve Bank,” though it will want to ensure pricing intentions don’t spill over into broader wage negotiations and price setting.

The New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion, which is closely followed by the central bank, comes out next week and has a strong correlation with the National Bank survey.

Businesswire.co.nz

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