Recession likely to be deeper than forecast, says NZIER

Domestic trading activity has fallen again, says the latest Quarterly Survey of Business Opinion

The economy shrank at least as much in the first three months of 2009 as it did in the last quarter of 2008, the New Zealand Institute of Economic Research (NZIER) is predicting.

Publishing its latest Quarterly Survey of Business Opinion (QSBO) today, NZIER said that when seasonally adjusted the net balance of firms reporting a fall in their own activity worsened to 47 per cent in the March quarter.

That was the worst result since at least 1970 and compared with 44 per cent in the previous survey.

Expectations improved slightly but were still low, with a net 38 per cent of firms reporting they expected a drop in their own activity in the June quarter, compared with a net 43 per cent expecting a decline in the previous survey.

When not adjusted, the net balance of firms expecting the general business situation to deteriorate in the next six months was 65 per cent, following 64 per cent in the December quarter

The recession was likely to be deeper than previously forecast, NZIER said.

Results from the QSBO suggested the gross domestic product figure for the 2009 first quarter would be as bad, if not worse, than the 0.9 per cent contraction seen in the December quarter.

The QSBO also suggested little inflation risk in the short run, and suggested scope for the Reserve Bank to cut interest rates further.

At its April 30 announcement, the Reserve bank had an opportunity to make another cut to the official cash rate to bolster flagging consumer spending, NZIER said.

That in turn would encourage firms to maintain their labour and capital stocks in readiness for meeting growing demand once the domestic and global economies started to pick up.

A net 36 per cent of firms reported they intended to reduce staff numbers during the next three months, after a net 34 per cent actually did in the past three months. Those figures were the highest since late 1991.

Finding skilled and unskilled labour had become historically easy, NZIER said.

A net 42 per cent of firms reported that it had become easier to find skilled labour and a net 63 per cent that it had become easier to fined unskilled labour. Both figures were at their highest for more than 30 years.

Firms were reporting that weak sales growth was having a significant impact on their employment and investment decisions, NZIER said.

Facing falling demand, firms were operating at 86.3 per cent of full capacity.

"They are responding rapidly and rationally to this drop off in activity by trimming costs - including their labour and capital inputs - and lowering selling prices."

Investment intentions for the next six months were the lowest recorded since the survey started in 1975, for both buildings and plant and machinery.

"If these intentions are realised, cutting back on investment now could hold back future growth and make for an even longer and slower recovery," NZIER said.

For the first time in nearly a decade, a net balance of firms reduced their selling prices in the past three months.

Increasing numbers of firms expected cost pressures to continue easing and prices to fall in the near future, which suggested inflation would drop further.

A net 51 per cent of firms reported a decline in profitability in the past three months, the most for more than 30 years. A net 45 per cent of firms reported they expected a decline in profitability in the next three months.

- NZPA