Business confidence perks up but remains deeply negative

Business confidence picked up in the March quarter, but the economy could already be in a mild recession, according to data out today from the New Zealand Institute of Economic Research (NZIER).

The independent think tank's Quarterly Survey of Business Opinion (QSBO) found a net 49 per cent of firms expected conditions to deteriorate over the next six months.

That compared with 61 per cent who expected conditions to worsen in the last survey in the December quarter.

On a seasonally adjusted basis, a net 41 per cent of firms expected conditions to deteriorate, compared to 68 per cent in the previous QSBO.

Gross Domestic Product (GDP) fell 0.1 per cent in the December quarter, and NZIER said the domestic trading activity statistics from this QSBO were consistent with GDP having fallen again in the March quarter. Two quarters in a row of negative GDP growth would mean the economy was in a technical recession.

"In other words, the March QSBO survey is suggesting the New Zealand economy is already in a recession, albeit a relatively mild one in terms of the extent of the dip in real GDP," NZIER said in a commentary.

A seasonally adjusted net 7 per cent of firms reported a fall in their own activity in the past three months.

NZIER said this was the most negative figure since December 1998, at the end of the Asian financial crisis. But a net 2 per cent of firms expected their own activity to rise over the next three months. NZIER said this suggested if the recession were confirmed it would be short-lived and shallow.

NZIER said the fall in the New Zealand dollar over the quarter had been a driving factor behind the rising confidence.

On a trade-weighted basis, the New Zealand dollar fell 10.3 per cent over the quarter, dropping 11.1 per cent against the US dollar and 7.4 per cent versus the Australian dollar.

The think tank said the Reserve Bank's monetary policy stance would also have underpinned confidence.

RB governor Alan Bollard held the key interest rate steady at 7.25 per cent in March, and said he did not expect to raise interest rates again in this cycle, as long as inflation risks remained under control.

The labour market continued to soften, with a net 2 per cent of firms saying they intended to reduce staff numbers over the next quarter, and a net 4 per cent of firms saying they had cut staff during the past three months.

In the building sector a net 11 per cent of firms shed labour over the past three months, while 18 per cent of firms in the manufacturing sector laid off employers. The services industry remained buoyant though, with a net 7 per cent of firms saying they intended to hire more staff in the next quarter.

Capacity utilisation, which is closely watched by the Reserve Bank as an indicator of how the economy is going, fell fractionally to 91.4 per cent, from 91.5 per cent in the previous survey. NZIER said it was the fifth consecutive quarter that capacity utilisation had fallen.

A net 25 per cent of firms increased selling prices over the quarter, compared with 23 per cent in the previous QSBO. Intentions to raise prices over the next quarter eased to 26 per cent, from 33 per cent in the December quarter.

Among the regions, the biggest bounce back in confidence was recorded by firms in the lower North Island and the South Island.

Goldman Sachs JB Were economist Shamubeel Eaqub said the numbers were consistent with very weak growth rather than recession.

" Moderation in pricing intentions, slowing activity and some easing in parts of capacity pressures suggest that the RBNZ's next move will be down, but in the absence of severe risk of recession we believe this will be in September, not as early as July as some in the market expect." he said.

- NZPA