Confidence survey increases pressure for OCR cuts

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

The pressure on the Reserve Bank to further cut official interest rates went up today with the publication of a "grim" Quarterly Survey of Business Opinion (QSBO).

Published by the New Zealand Institute of Economic Research (NZIER), the survey found 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 December quarter 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.

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, NZIER said.

ANZ bank said the survey made for grim reading, with the economy contracting at an "alarming" rate.

"The labour market continues to deteriorate and investment plans are on hold - both disconcerting signs."

Forecasts by the Reserve Bank for a strong rebound in the second half of 2009 were looking unlikely, ANZ said.

Monetary conditions needed to ease "a lot" further, with the currency needing to adjust lower to support the economy.

But given the global forces restraining the NZ dollar's adjustment and today's glum confidence reading, the odds now shifted towards the official cash rate (OCR) heading towards 2 per cent, from 3 per cent now.

ASB economists Nick Tuffley and Jane Turner said the main source of their concern from the QSBO was the sharp decline in capacity utilisation and further deterioration of employment conditions and investment expectations.

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.

The sharp fall in capacity utilisation to 86.3 per cent from 88.8 per cent in the previous survey was one of the largest quarterly movements seen for some time, the ASB economists said.

With space capacity rapidly freeing up and the labour market becoming increasingly easier, inflation concerns were now a thing of the past for the Reserve Bank.

Based purely on economic considerations, the more prudent course of action with the OCR would be a 50-basis point cut at the end of this month, and eventually dropping the OCR to 2 per cent.

Westpac economists are expecting a 50bp cut at the April 30 review of the OCR.

"The New Zealand economy, still wearing the bruises from the domestically driven recession of 2008, has fallen into a deeper globally driven downturn in the first half of this year," Westpac economists Brendan O'Donovan and Michael Gordon said.

The QSBO offered little hope that business activity would stabilise in the second half of this year.

BNZ Capital senior economist Craig Ebert said the QSBO was "seriously bad", with BNZ expecting a 50bp cut to the OCR at the end of the month and an eventual low of 2 per cent.

- NZPA