NZ firm remain relatively upbeat

Press Release – JP Morgan

The headline reading on the NBNZ business confidence index headed lower in May, but by less than expected. A net 48% of respondents (J.P. Morgan: 45%) to the survey expect that business conditions in New Zealand will improve over the next 12 months, …The headline reading on the NBNZ business confidence index headed lower in May, but by less than expected. A net 48% of respondents (J.P. Morgan: 45%) to the survey expect that business conditions in New Zealand will improve over the next 12 months, down from 50% in April Furthermore, the all-important firms’ own activity outlook index rose unexpectedly, increasing from a reading of 43.0 to hit an eleven-year high of 43.5 in May. This supports our call for the economy to expand at a healthy clip in coming quarters (see chart below). Our forecast is for GDP growth of 0.5%q/q in 1Q, but a stronger 0.9% rate in the following two quarters thereafter.

We had anticipated a larger fall in the headline reading, owing mainly to heightened sovereign concerns in the Euro area, but also to mixed economic messages and the recent sell-off in global equity markets. The NBNZ said, though, that these developments were too late in the month to be captured by the survey, which had a close off date of May 14. Next month’s survey will, therefore, probably show a significant drop in business confidence.

According to the NBNZ, the improvement in confidence over the month was relatively broad-based across sectors. In absolute levels, confidence in the construction sector remains the most optimistic even though it showed the biggest drop over the month. A net 36% of those surveyed in the construction sector expect conditions to improve over the next 12 months, down from a net 50% previously. Sentiment in commercial construction shot up, however, with a net 18% expecting conditions to improve. In contrast, the agriculture sector continues to be the most downbeat, and recorded a six point drop in May, probably owing to drought conditions in some regions.

Surprisingly, the retail sector posted the biggest rise in sentiment in May, with a 10 point jump. Indeed, consumer confidence has remained upbeat, although this optimism has yet to translate to stronger spending. Retailers are becoming more optimistic, however, possibly owing to the significant improvement in the labour market in 1Q. The labour market should continue to tighten – firms’ employment intentions rose three points in May, showing that a net 16% of firms now expect to hire new staff, the highest reading since April 2002. This means that wage growth should pick up, giving a lift to households’ disposable incomes and, eventually, the retail sector.

The good news in this report notwithstanding, it has few implications for our RBNZ call. We believe that the RBNZ will stand pat next week, mainly owing to the risk that current financial stresses in the Euro area could spill over into the real economy. Indeed, a slowdown in global growth poses a significant risk to the outlook for New Zealand, particularly given the fragile state of the domestic recovery. For reasons as such, the RBNZ can afford the time to sit on the policy sidelines next month.

The next tightening cycle will kick off this year, however, with our forecast calling for the first hike to be delivered in July. The medium term inflation outlook is deteriorating. Inflation expectations in the NBNZ survey were unchanged at 2.7% in May, although probably will shoot through the top end of the RBNZ’s 1%-3% target range in coming months. Indeed, inflationary pressures will intensify given the forthcoming GST hike on October 1 and given the further increase in capacity utilization in May.

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