Recession pessimism tipped to be a one-quarter wonder

Business confidence has slipped to levels that have, historically, coincided with a shrinking economy.

But ANZ National Bank's acting chief economist Cameron Bagrie thinks the contraction will prove to be a one-quarter wonder.

"My view at the moment is that New Zealand is being talked into recession as opposed to being in the midst of one," he said, releasing the bank's latest monthly confidence survey, which showed a net 4 per cent of firms expect their own activity to decline.

"Such levels have typically coincided with a short-term contraction in economic activity. But my suspicion is that we are seeing a confidence-inspired cautious drop in activity, rather than an underlying rout.

"Growth will continue to moderate, but I find it difficult to envisage a recession when you've got an unemployment rate of 3.6 per cent, corporate balance sheets are strong and the Government is spending a lot of cash."

His view was reiterated by Finance Minister Michael Cullen, who warned yesterday against giving credence to "panic merchants".

"The [business sentiment] surveys that gave rise to the current consternation merely confirm that businesses are expecting an immediate drop-off in growth. They do not change the medium-term expectation that growth will pick up again in 2007," Cullen said.

Bagrie thinks the situation is similar to 2000.

"We had the economy going gangbusters over 1999. People got a bit nervous when they saw interest rates heading through the roof. Oil prices went through the roof as well, putting a squeeze on disposable income. All of a sudden we had a collapse of confidence and the economy went into reverse one quarter. But it was short-lived."

The bank's February survey found a net 62 per cent of firms expect the general business situation to get worse. A net 4 per cent expect their own activity to fall, compared with a net 2 per cent last time. But encouragingly for the Reserve Bank, inflation expectations have dropped, too, from 3.35 per cent to 3.14 per cent.

A net 22 per cent of firms expect to raise their own prices, up from 21 per cent in the previous survey, but that is still lower than the recent average.

ANZ National Bank has brought forward to September its pick for when the Reserve Bank will start cutting interest rates; its previous forecast was the end of the year.