NZIER sees 'synchronised slowdown' in regions & sectors, warns of potential double-dip recession

The economy contracted in the September quarter with a "synchronised slowdown across regions and sectors," according to the New Zealand Institute of Economic Research (NZIER).

(Updates add comments from ASB economist Christina Leung and ANZ's Mark Smith).

In its Quarterly Survey of Business Opinion (QSBO) released today, NZIER says firms’ experienced activity fell from -4% to -15% on a seasonally adjusted basis in the September quarter from the June quarter.

"There was a synchronised slowdown across regions and sectors," NZIER principal economist Shamubeel Eaqub said.

"Construction and financial services slowed most sharply. Manufacturing exports were steady at barely positive."

“Activity contracted and expectations are being revised down," Eaqub added. "The recovery continues to disappoint optimistic expectations. Seasonally adjusted business confidence fell from 26% to -9%, the first negative reading in a year. Renewed weakness in activity, profits and a shallow recovery have depressed confidence."

At a Wellington media briefing Eaqub reportedly put the prospect of a double dip recession at 50/50. Statistics New Zealand recently said Gross Domestic Product (GDP) rose just 0.2% in the June quarter.

Eaqub said the QSBO showed  business profitability was deteriorating again; something that was highly unusual for this stage of an economic recovery.

He said this could weigh on future hiring and investment, although hiring and investment intentions remained encouragingly resilient. Actual hiring eased to -12% from -7%, but was still consistent with improving hiring. Eaqub said overall labour was getting harder to find, but a little easier in construction and retailing, which would support wage growth over the coming year.

Inflation subdued

Meanwhile, actual prices charged edged up slightly, 15% from 13%, but remained consistent with subdued inflation.  And although cost and price expectations were rising, companies have little pricing power and a lack of demand was the key issue.

"Capacity pressures, which indicate medium term inflation, are mixed," said Eaqub.

"Capacity utilisation of manufacturers and builders eased a touch, but remains elevated (90.4% from 90.8%). Capacity as a constraint on the other hand remains at a historically low level."

The survey results showed no discernible impact of the September 4 Canterbury earthquake.

"Renewed economic weakness, distant inflationary pressures and a fragile global setting will see the Reserve Bank hold the Official Cash Rate (OCR) steady (at 3%) until early 2011," Eaqub added.

Firms struggling to pass on costs

ASB economist Christina Leung said the key results from the QSBO were the big fall in headline business confidence and drop in firm's own trading activity to -2% from 14.7%.

Leung said it appeared that firms were finding it hard to pass on rising costs, with a smaller proportion of businesses indicating they intend to raise prices despite the increasing proportion of businesses facing higher costs. This had hampered profitability and was the key driver behind the fall in business confidence.

"Further declines in profitability over the coming year may lead businesses to put expansion plans on hold," said Leung.

She doesn't expect the Reserve Bank to increase the OCR until next March.

Although pessimism was particularly acute in the building and retail sectors, Leung said following the Canterbury earthquake reconstruction activity should boost the building sector over the coming year.

Deleveraging taking a toll but ANZ predicts 4% growth next year

ANZ economist Mark Smith described the QSBO as "unequivocally weak across the board." He said deleveraging continued to act as a headwind for economic activity.

"The QSBO was weaker than the National Bank Business Outlook was flagging, and points to a soggy second-half year GDP performance, following a subdued first-half," said Smith.

"But we are still sticking to our above consensus call for calendar 2011, expecting growth of close to 4%."

The better outlook next year was based on increased rural incomes (Fonterra's forecast payout for the current 2010/11 season is NZ$7.00-NZ$7.10 per kilogram of milk solids up from NZ$6.37 in the 2009/10 season), an unleasing of pent up demand, earthquake reconstruction work and Rugby World Cup related activity.

ANZ also expects the Reserve Bank to leave the OCR unchanged until the first quarter next year.