Business confidence drops 9 per cent

ANZ chief economist Cameron Bagrie says economic momentum is easing. Photo / NZ Herald

New Zealand business confidence extended its slide from a record high to a third month, in the face of rising interest rates, declining dairy prices and a persistently high kiwi dollar.

A net 53.5 per cent of firms are optimistic about general business conditions this month, down from 64.8 per cent in April and a 20-year high of 70.8 per cent in February, according to the ANZ Business Outlook survey.

"Economic momentum is clearly easing," said Cameron Bagrie, chief economist at ANZ Bank New Zealand. "All up, it's of little surprise to see most survey indicators nudging lower but still well north of 'average', implying we're still in an economic sweet-spot."

Agriculture was the most pessimistic sector, dropping 12 points to 30.6 per cent, which may in part be driven by a drop in prices for global dairy products.

Dairy prices fell to a new 15-month low in the latest GlobalDairyTrade auction last week, after spiking up in early 2013. Dairy is New Zealand's largest export, making up 30 per cent of goods headed offshore. This morning, Fonterra Cooperative Group, the world's largest dairy exporter, forecast a 17 per cent drop in its milk payout for 2014/2015.

The New Zealand dollar softened after the report. It was recently trading at 85.44 US cents from 85.60 cents immediately before the 1pm release.

Construction was the most bullish sector at 63 per cent, having slipped from 65.4 per cent in the previous month. Services slipped to 61.1 per cent from 68.5 per cent. Retail plunged to 51.4 per cent from 71.1 per cent and manufacturing slipped to 40.6 per cent from last month's 61.3 per cent.

The performance of manufacturing index slipped in April, while government data earlier this month showed retail sales grew at a slower-than-expected pace in the first quarter of this year, as the Reserve Bank kicked off a cycle of interest rate hikes to put a lid on inflationary pressures.

The Reserve Bank has signalled more interest rate increases are to come although the pace may slow as the kiwi dollar remains high, which is exerting downwards pressure on tradable inflation.

A net 88.7 per cent of those polled expect interest rates to rise, up from 86.3 per cent last month, while those expecting to raise prices fell to 27.5 per cent from 30.2 per cent and inflation expectations declined to 2.55 per cent from 2.59 per cent. Exports slid to 24.7 per cent from 34 per cent.

Firms' confidence about their own activity outlook eased back to a net 51 per cent from 52.2 per cent and investment intentions fell to 23.4 per cent, from 29.5 per cent, while expectations of taking on workers, was flat at 29.8 per cent. Those seeing higher profits ahead slipped to 31 per cent from 35.7 per cent