Latest NZIER Quarterly Survey of Business Opinion suggests GDP could fall below 1% later this year; RBNZ likely to be forced to cut interest rates further

Yes, businesses really ARE that gloomy and the consequences are likely to be yet more interest rate cuts from the Reserve Bank.

The latest Quarterly Survey of Business Opinion (QSBO) from the New Zealand Institute of Economic Research has produced results that suggest GDP annual growth may slip below 1% later this year.

Another awful survey result (and this one in probably the most influential survey) follows hot on the heels of Monday's ANZ Business Outlook, which showed business confidence at levels not seen since the Global Financial Crisis.

The, frankly terrible, results in both the ANZ and now NZIER surveys will give the Government indigestion and will increase the pressure on it to free-up the purse strings and spend some money to stimulate activity.

And it will force the RBNZ to redouble its efforts to stimulate a now seemingly unwilling economy.

A further Official Cash Rate drop by the Reserve Bank next month (from the current 1%) now seems locked-in.

The QSBO showed a further drop in overall business confidence in the September quarter, with a net 35% of businesses expecting a worsening in general economic conditions. This is the weakest level since March 2009.

More significantly, there was also a decline in firms’ own trading activity, which is a better indicator of demand in the New Zealand economy.

NZIER said the net 11% of businesses reporting that demand fell over the quarter brings this measure to its weakest level since September 2010.

"The result suggests annual GDP growth will ease below 1% later this year," NZIER said.

Bring on the cuts...

ASB chief economist Nick Tuffley said the QSBO survey "flags the risk" that the economy lost further momentum over the third quarter of the year. 

"...And, with inflation indicators also softening, the need for further stimulus is greater.

"We now expect a further 50bp in total of OCR cuts, 25bp in November and now 25bp in February, taking the OCR to a fresh record low of 0.5%," Tuffley said. 

"After the decidedly mixed response to the 50bp OCR cut, we expect the RBNZ will revert to smaller 25bp steps."

Kiwibank economists now also see the OCR hitting 0.5% - but they still think there's a possibility there will be another double cut. As Kiwibank chief economist Jarrod Kerr puts it, business confidence is "crumbling".

"We had assigned an uncomfortably high 40% probability of a move to just 0.5%. The confidence surveys have tipped us over the line," he said.

"There’s now a 60-70% chance of a cut to 0.5%, in our opinion.  And we therefore assign another uncomfortably high 40% probability of a (banking capital requirement) cut to just 0.25% in early 2020.

"We must not rule out another 50bps cut in November. The RBNZ have shown us that if they think it necessary, as we do, then they’ll deliver it up front. Both the RBNZ and RBA [Reserve Bank of Australia] could be at 0.5% before Christmas."

ANZ senior economist Miles Workman and economist Michael Callaghan noted that the results of the NZIER survey were actually weaker than those in the ANZ survey released the day before.

'Not firing on all cylinders'

"Today’s release suggests the economy continued to splutter in Q3 and probably won’t be firing on all cylinders come Q4 either," they said.

"Firms are now reporting that sales (demand) are an increasing constraint on activity while capacity and labour constraints are easing. And with economic growth already running at a pace consistent with waning inflation pressures this will put the RBNZ on notice.

"We think that by November, the evidence will be clear that a significant growth rebound is not on the horizon, and that the RBNZ will cut the OCR once again.

"We have pencilled in two follow up cuts (February and May) which will take the OCR to just 0.25%. While the survey suggests that the outlook for Q4 is a bit brighter, the RBNZ will be wary that the best activity indicators from the QSBO are based on past activity, rather than expectations of the future."

This is what the statement from NZIER said on Tuesday:

The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows a further drop in business confidence in the September quarter. A net 35 percent of businesses expect a worsening in general economic conditions – still the weakest level since March 2009.

There was also a decline in firms’ own trading activity, which is a better indicator of demand in the New Zealand economy. The net 11 percent of businesses reporting demand fell over the quarter brings this measure to its weakest level since September 2010. The result suggests annual GDP growth will ease below 1 percent later this year.

Manufacturing sector remains the most pessimistic

Although there was some improvement in sentiment amongst manufacturers, the manufacturing sector remains the most downbeat of the sectors surveyed. The continued weakening in both domestic and export demand continues to weigh on profitability in the manufacturing sector. The continued uncertainty over how the trade war between the US and China will play out is dampening manufacturing demand globally. We expect this uncertainty will remain a headwind for the manufacturing sector over the coming year.

Meanwhile, there are signs construction demand is slowing. Building sector firms have lowered their output expectations, while the measure of architects’ activity in their own office points to a reduced pipeline of residential and commercial construction. This is consistent with the drop in firms’ intentions to invest in buildings over the coming year.

Retailers are also more downbeat in the face of weaker demand. Profitability in the retail sector is at the weakest level since September 2009, as retailers struggle to pass on rising costs by raising prices.

Firms more cautious about expanding

The combination of intense cost pressures and weak pricing power continues to weigh on profitability across most sectors. This is making firms more cautious when it comes to hiring and investing. A net 10 percent of firms cut staff numbers – the weakest level in this hiring measure since September 2012. Added to the cautious tone was the decline in investment intentions for buildings and plant and machinery, with both measures reaching their lowest levels since September 2009.

Firms downbeat across all regions

The downbeat mood was prevalent across all regions, but the provinces were particularly pessimistic. Over half of businesses on the West Coast and Nelson expect a deterioration in general economic conditions over the coming months.

As the graph below shows, the drop in firms’ own trading activity suggests further slowing in the economy.