Business mood at blackest since '85

By BRIAN FALLOW economics editor

Business confidence plummeted in the Institute of Economic Research's March survey.

But the quarterly survey of business opinion provided mixed signals on whether the Reserve Bank will cut interest rates soon: confirming that the economy is slowing but showing resources still stretched tight.

A net 36 per cent of respondents expect the general business environment to worsen over the next six months, compared with a net 3 per cent in December expecting an improvement.

Adjusted for seasonal variation the fall was even steeper, from a net 9 per cent pessimistic to a net 56 per cent, the lowest since 1985.

"The economy can sustain one quarter of weak confidence," the institute said.

"But if confidence remains low then economic activity will almost certainly be weaker and the Reserve Bank will probably reduce the official cash rate to stimulate activity."

The institute said exporters tended to be more pessimistic than their non-exporting counterparts, reflecting the higher New Zealand dollar and nervousness about the global economy.

Economists said the difficulty in interpreting the headline number was to know how much of it was uncertainty about how long the war in Iraq would last and what the impact on oil prices would be - concerns that might now be dissipating - and how much reflected an underlying slowdown in the economy.

Concerns about electricity prices and the Sars virus came too late for the survey.

Most of the indicators in the survey point to the economy slowing from the headlong 4.4 per cent pace of last year.

Firm's own trading activity was less buoyant than in December, with a net 16 per cent (seasonally adjusted) reporting increased activity down from a net 24 per cent three months ago.

UBS Warburg chief economist Robin Clements said that indicator was a good pointer to economic growth and was consistent with growth slowing to 3 per cent by mid-year.

Firms' expectations for their activity over the next three months have dropped sharply.

Capacity utilisation by manufacturers and builders eased slightly after six quarterly rises, but remains high by historical standards.

Investment intentions slipped but remain above their historical averages.

Hiring intentions also remain high.

The proportion of firms reporting difficulty in finding both skilled and unskilled labour has increased.

"That's very hard to fathom," said ANZ chief economist David Drage. "We had expected the continued strength of net immigration would be starting to provide some relief."

It was also at odds with declining levels of job advertising over the past two months.

Neither capacity utilisation nor skill shortages provide much comfort to a Reserve Bank looking for evidence that the pressure on resources in the economy is easing.

"But they tend to be lagging indicators," said the Bank of New Zealand's head of market economics, Stephen Toplis.

"The danger is we focus on them just when they are about to crumble."

There was no doubt the economy would slow; the question was how much and why, Toplis said.

If it was because of supply-side factors such as the drought or shortages of labour or electricity, then an easing by the Reserve Bank, which would boost demand, would only make things worse.

While there were early signs of a slowdown on the demand side, in flat retail sales and declining building consents for example, it would still be questionable whether it was slowing enough to trigger an easing.

The institute said more firms reported rising costs in March than in December, and more still expect increases in the next three months.

If that was driven by higher oil prices, the Reserve Bank should look through that one-off price shock in setting monetary policy.

But, if enduring labour market tightness kept costs high, the impact on inflation might be longer lasting and the bank might choose to wait before cutting rates.

Deutsche Bank chief economist Ulf Schoefisch said the Reserve Bank was likely to not cut the rate on April 24, and await more data. Deutsche Bank saw June 5 as the likely date for the first 25 basis point easing step.