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NZ firms most gloomy since 1982, as economic slump persists

Tuesday 8th July 2008

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New Zealand companies became the gloomiest about profits in more than 25 years amid signs the economy’s contraction will extend through to at least September.

A net 23% of firms surveyed expect trading activity will decline over the next three months and 40% expect profits will fall, the most negative since December 1982, according to the New Zealand Institute of Economic Research’s Quarterly Survey of Business Opinion.

In a covering statement headed “Stagflation underway,” the NZIER said indicators of domestic trading suggest the economy is in the midst of a recession at least nine months long. The survey follows polls showing a slump in consumer confidence as high borrowing costs, surging prices for food and fuel dent household spending and demand for housing.

At the same time, the economy is dogged by “strong, persistent inflationary pressure,” NZIER said. Stagflation is a period of slowing or shrinking GDP and rising unemployment, accompanied by accelerating inflation.

“While there has been a notable easing in the difficulty finding labour, other indicators of inflation suggest inflationary pressures will persist, which will increase the Reserve Bank’s discomfort in relation to pricing intentions and inflationary expectations,” the NZIER said.

Reserve Bank Governor Alan Bollard last 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. Economists predict the bank will begin lowering the official cash rate from a record 8.25% as soon as this month and may extend its cuts through 2009.

General Mood Brightens

Indicators of confidence in the general business situation picked up in the latest survey, consistent with headline figures for National Bank’s business confidence survey. A net 54% of firms expect business conditions to deteriorate in the next six months, down from a net 56% in the first quarter, which was the worst outcome since December 2005.

A net 6% of firms expect to reduce workers in the next three months, up from a net zero who planned to cut staff in the first quarter.

By Jonathan Underhill

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