Gloom descends as business confidence falls to 17-year low

By SIMON LOUISSON

A pall of gloom is descending on the economy despite welcome news today that the war in Iraq is virtually over.

The war, the Severe Acute Respiratory Syndrome (Sars) virus scare, concern about electricity supply and prices and the high New Zealand dollar have acted to dampen the previously buoyant economy.

The New Zealand Institute of Economic Research (NZIER) published its latest Quarterly Survey of Business Opinion (QSBO) today showing business confidence had plunged to a 17-year low.

As well, an ANZ Bank survey of newspaper job advertisements out today showed ads fell for the second consecutive month in March and it forecast higher unemployment, albeit from a 14-year low rate of 4.9 per cent.

The sharemarket, which has recently rallied with world markets on optimism about a short war, like Wall Street, turned negative today.

"The reality out there is the global economy is still relatively soft and there's not one economy that will take up the slack like America has in the past," ABN Amro Craigs retail equities adviser Nigel Scott said.

The NZ50 gross index fell 23.6 points, or 1.2 per cent, to 1948.

The highly respected independent NZIER said a net 56 per cent of businesses are pessimistic about business conditions over the next six months -- the lowest level since December 1985.

The seasonally-adjusted figure compared with a net 9 per cent who expected a deterioration in the December survey.

Ignoring seasonal adjustment, a net 36 per cent of firms are pessimistic compared with 3 per cent expecting an improvement in the December survey.

"Clearly, the international situation is taking its toll on business confidence," economist Peter Gardiner said.

A net 16 per cent of firms reported an increase in own activity, down from 24 per cent in the previous survey.

The survey was sent out before the Iraq war started on March 20 and survey results came in the last two weeks of March. However, the survey did not take account of the Sars scare.

"Overall, the survey results are consistent with our assessment that economic growth has peaked and will soften over the coming year," Mr Gardiner said.

He said the Iraq war was making firms nervous. Oil prices hadn't peaked when the survey was taken but have since fallen sharply.

Senior economist Mark Walton said it was too early to tell what effect the defeat of Iraq would have.

"Once Iraq goes away, attention will return to other factors overseas -- the US economy is shaky and Australian confidence is low."

The good news is that the plunge in confidence increases the chances of a cut in interest rates as soon as June.

The Reserve Bank is due to review the Official Cash Rate (OCR) on April 24 and shortly after, on June 5, will release its quarterly monetary conditions review.

Although evidence is stacking up that bank governor Alan Bollard should act sooner rather than later, Mr Gardiner said the bank would probably wait for confirmation of this survey before it cut rates.

A spokeswoman for Finance Minister Michael Cullen said the survey result was in line with other surveys and unsurprising given the environment of the war, Sars and the power situation.

Mr Gardiner said the economy could sustain one quarter of weak confidence, but if confidence remained low, then economic activity would "most certainly be weaker and the Reserve Bank will probably reduce the OCR to stimulate activity".

The survey revealed a benign inflation outlook thanks to weak world demand and the strong currency lowering prices of tradeable goods. That should help the Reserve Bank in its decision to cut interest rates, said Mr Gardiner.

Despite the benign inflation outlook, a greater number of firms reported an increase in costs, partly because of the oil price rise and partly because of a tight labour market.

Mr Gardiner said that if the New Zealand dollar fell back then that would reinvigorate the economy and the bank would have less cause to cut interest rates.

Capacity utilisation, a measure which the bank watches closely, was still at historically high levels -- 91 per cent against 91.5 per cent in the December quarter -- and that may encourage the bank to hold off an interest rate cut until at least June 5. The December level was an 18 year high.

Mr Gardiner said the New Zealand dollar, which climbed again during the March quarter after a steep climb in 2002, would have dented exporters' confidence.

"Closer to home, hints of a looming electricity shortage would have added to firms' worries," he said.

Confidence fell sharply in all sectors with the manufacturing and service sectors experiencing the largest declines. Exporters tend to be more pessimistic than non-exporters, reflecting a higher New Zealand dollar and nervousness about the global economy.

Sixty per cent of exporters are gloomy about the next six months.

- NZPA