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Offshore turbulence dents confidence, but only marginally


Wednesday 31st August 2011

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Offshore turbulence dents confidence, but only marginally


Own activity outlook: 43.3; Previous: 43.7
Business confidence: 34.4; Previous: 47.6
Pricing intentions: 20.5; Previous: 29.0
Hiring intentions: 9.1; Previous: 18.9
Investment intentions: 12.3; Previous: 17.9
Profit expectations: 15.6; Previous: 23.9
Exports: 18.5; Previous: 31.4

BOTTOM LINE: While business sentiment and some activity gauges show that firms are becoming more nervous with the outlook (no doubt related to global financial market volatility), the changes were relatively modest. We believe the survey remains consistent with a continuation of solid domestic economic momentum for the remainder of CY11.


1. The August NBNZ Business Outlook survey is the first comprehensive read on business sector optimism following the latest bout of global financial market turbulence. This turbulence appears to have had some impact, with headline business confidence dropping 13 points to a net 34%. However, the level of confidence remains solid and still well up on the net -9% lows hit after the February earthquake.

2. More stark was the fact that firms' own activity expectations, which has a better read-through to economic activity, barely moved, at a net 44%. This leaves it near the highs experienced in early to mid-2010 and at face value is consistent with a continuation of solid domestic growth momentum over the remainder of CY11. It is also consistent with our above consensus CY11 GDP forecasts. In saying this, there are some weaker nuances in other activity measures. Profits, employment and investment gauges all retreated. But with the exception of investment intentions are above historical averages. Export intentions recorded a sharp drop, falling 13 points to a net 19%, which is the lowest since July 2009. This in itself reinforces that the weaker global backdrop and persistently high NZ$ are causing concern in some areas.

3. So how do we interpret the results? While firms can potentially see the storm clouds building offshore, on the whole it appears that most are yet to notice any of this impact domestically. This is key. The 2008/09 episode showed us that financial market shocks can quickly begin to feed back into further pressure on real economies. While the jury is still out on whether this is occurring offshore, for NZ at least, it does not appear to be happening in a major fashion just yet. But we are watching closely.

4. Monetary policy: In our view the RBNZ would have taken much interest in today's survey as a potential early signal for how global economic and financial market ructions were impacting domestic sentiment (and possibly the real economy). The fact that optimism was not dented materially should be comforting and perhaps suggests the recovery forming is of a more robust variety than experienced over 2010. News on the inflation front also remains less benign than we would have hoped with inflation expectations rising to 3.5% from 3.2% (although firms' pricing intentions did drop to a net 21% from net 29%). In saying this, we still believe that the level of global uncertainty and "tail risk" evident will be of concern and we see the risks clearly skewed towards the RBNZ remaining on hold for longer. Our monetary policy expectations are currently under review.


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