Economic outlook goes from bad to worse

Business confidence is at its lowest point since 1974. Photo / Herald file

Business confidence has gone from bad to worse, the Institute of Economic Research's quarterly survey of business opinion shows, suggesting the nation faces a deepening recession.

Firms' reported activity over the past three months - a good indicator of economic growth - is the weakest it has been since at least 1970. Expectations about their own activity over the next three months improved slightly but remain very low.

Confidence about the general business situation is the weakest since 1974, though only marginally weaker than in December.

Employment intentions are the lowest since 1991. The flipside of that - the ease of finding labour - is the highest for at least 30 years.

Investment intentions are the weakest since the survey began asking about them in 1975. That is not surprising when capacity utilisation is the lowest since 1992 and profitability the weakest for at least 30 years.

"If these intentions are realised, cutting investment now could hold back growth and make for an even longer and slower recovery," NZIER economist Johannah Branson said.

She said the survey suggested March quarter gross domestic product could be as bad or worse than December, when a 0.9 per cent contraction was the worst since 1992.

For the first time in 10 years more firms reported they had lowered their selling prices in the past three months than raised them, and even more expect to do so in the next three months.

With inflation off the radar, the QSBO results suggested scope for a lower official cash rate, perhaps a 50-point cut on April 30, Branson said.

Westpac, ASB and Bank of New Zealand economists said the weak QSBO, on top of the tightening in monetary conditions in the past few weeks, sealed the case for a 50-point cut.

Longer-term interest rates fell when the QSBO was released, the two-year swap down 10 basis points, while the kiwi surrendered more than half a cent of gains against the US dollar.

Goldman Sachs JB Were economist Shamubeel Eaqub said the survey suggested the recession was likely to deepen in the first half of this year and the pull-back in hiring and capital-expenditure intentions could continue to drag on growth in the second half.
"While there have been recent encouraging signs in the housing market, the survey today highlights the breadth and depth of the recession."

ANZ National Bank economist Philip Borkin said that while some indicators - particularly in relation to the housing market - had pointed to conditions stabilising, with the labour market deteriorating that momentum would not be sustained.

Sharply lower growth among New Zealand's trading partners was also weighing on activity in the manufacturing sector, he said.

A net 57 per cent of manufacturers reported lower output - a 47-year low - and a net 52 per cent lower export orders. The institute said most of the survey responses had been received before the recent surge in the New Zealand dollar against the US currency.

In the building sector a net 37 per cent reported a fall in activity in the past quarter, compared with a net 23 per cent three months ago.

Borkin noted a sharp drop in the number of architects expecting public sector work over the next few years.

"Given that we are relying on government activity to provide a base level of support for the economy, this is not a welcome development."