Gloom darkens as rain holds off

By BRIAN FALLOW

Business sentiment lurched deeper into pessimistic territory this month as concerns about drought and a possible power shortage compounded existing fears on the international front.

The National Bank's monthly survey found 42 per cent of respondents expected the general business environment to deteriorate while only 9 per cent expected an improvement.

The net 33 per cent pessimistic reading compared with a net 16 per cent last month and is the lowest since the winter of discontent in 2000.

The pessimism has seeped from the way respondents feel about the general situation deep into their expectations for their own firms' outlook. Own activity, profit and export expectations have all worsened, along with hiring and investment intentions.

"When every indicator is pointing in one direction it makes you sit up and take notice," said the bank's chief economist, Dr John McDermott.

The National Bank's economists have changed their own view of the outlook. They now think the Reserve Bank will need to cut interest rates by three-quarters of a percentage point by the end of the year.

Previously, their view was that there was enough momentum in the domestic economy to cover the period until global growth recovered and that no adjustment to interest rates would be necessary.

But the recent international economic indicators had been disappointing, McDermott said, and in addition cracks were appearing in the domestic outlook including drought and the prospect of power shortages. "We are already seeing production cuts in electricity-intensive enterprises."

Although all sectors were pessimistic in the latest survey, agriculture's gloom has deepened markedly, from a net 46 per cent expecting worse times in February to a net 71 per cent now - the lowest confidence level for 15 years.

McDermott believes the new information reflected in that deterioration is the lack of rain and the possibility that the recent dry weather could become a drought.

That is on top of an appreciation of nearly 30 per cent in the New Zealand dollar over the past year.

In the retail sector, which had had a good run over the past year, activity expectations were easing and were well below their historical average, he said.