Confidence poll gives warning

By BRIAN FALLOW economics editor

The Institute of Economic Research's gauge of business sentiment is in the pessimistic zone for the third quarter in a row, a pattern which in the past has heralded a sharp slowing in economic growth.

A net 20 per cent of respondent firms expect the general business environment to deteriorate over the next six months.

That is an improvement on the net 36 per cent pessimism three months ago, but institute economist Peter Gardiner said the improvement was no more than would be expected with the end of concerns about war in Iraq, the Sars virus and electricity shortages which were weighing on business sentiment at the time of the March survey.

The "headline" measure of overall business confidence is volatile, and the economy can shrug off a quarter or even two of negativity.

But it is unusual for confidence to be negative for three quarters in a row.

Each of the three times that has happened since 1990, a sharp slowing in economic growth followed.

"Just as in softball, it appears the 'three strikes and you're out' rule applies to economic growth in New Zealand," Gardiner said.

The still-strong level of firms' expectations of their own activity suggests growth will remain solid in the near term, rebounding in the September quarter from the expected weak figure for the June quarter.

But over the year ahead, weaker growth would reduce pressure on the economy's resources and ease inflationary pressure.

Institute economist Doug Steel said that, and the less widespread cost and price pressures recorded in the survey, suggested the Reserve Bank should cut interest rates by another 75 basis points by the end of the year.

He said exporters were significantly more pessimistic than non-exporters - a net 28 per cent and a net 12 per cent respectively.

"Exporters tend to lead the economic cycle, and they are the ones taking the hiding," Steel said.

The institute forecasts annual growth slowing to a 2 per cent pace over the next two years, which is below par as growth has averaged around 3.5 per cent over the past 10 years, but is still a soft landing.

The survey's index of capacity use among manufacturers and builders, a measure closely watched by the Reserve Bank, rose in the June quarter and remains at historically high levels.

But all the latest increase came from the building industry. Capacity use among manufacturers declined.

Investment intentions remain above their historical averages, suggesting investment in plant and machinery will keep growing over the next 12 months.

Hiring intentions also remain positive.

But the survey gives some evidence that the tightness of the labour market may be starting to wane. Firms reported less difficulty in finding skilled and unskilled labour.

Another pointer to easing inflationary pressures is a drop in the number of firms intending to raise prices over the next three months, from a net 15 per cent in the previous survey to a net 4 per cent.

That is associated with a drop in the number of firms reporting increased costs, reflecting the lower cost of imported goods as the exchange rate appreciates.

Deutsche Bank chief economist Ulf Schoefisch wants the Reserve Bank to cut its interest rate by one percentage point to narrow the gap between New Zealand interest rates and those elsewhere, taking the steam out of the dollar's upward momentum.

He says fears that that would inflame an already overheated housing market are exaggerated.

"I don't think the housing market is overheated at this stage," he said.

'It's buoyant, but that's no bad thing at this point.

"When other things are under pressure, a bit of confidence coming out of the housing market is good for the economy.

" I don't think the housing market will be able to maintain this strength if the economy keeps dropping away.

"Cutting interest rates will help mitigate a slowdown in the housing market."