NZ economy moderated in Dec qtr as QSBO survey shows firms grew more pessimistic, NZIER says; First OCR hike may now be later than mid-2013

The first hike of the Official Cash Rate may now be later than mid-2013, due to heightened global tensions and weakening domestic activity, the New Zealand Institute of Economic Research (NZIER) says.

Economic activity moderated through the December quarter as firms grew more pessimistic and trading activity slowed, despite a post-earthquake rebound in Canterbury, the NZIER said in its latest Quarterly Survey of Business Opinion (QSBO) report. Firms’ experienced trading activity eased over the quarter, with figures pointing to 1.6% economic growth over the next year.

Easing costs and pricing intentions outside of the construction sector suggested inflation would be contained over coming quarters, and the Official Cash Rate was likely to remain unchanged “for some time,” NZIER principal economist Shamubeel Eaqub said.

Eaqub had been picking the first hike of the Official Cash Rate around mid-2013, although that may now be later, he said. Despite moderating activity, resistance to a cut in the OCR would be high.

Domestic trading activity outside of Canterbury had slowed for two consecutive quarters.

“Activity eased in the December quarter. While services and retail grew, manufacturing was flat and there was less construction,” Eaqub said.

“Canterbury is rebounding from the earthquake disruption, but the rest of the country is slowing. Retailers’ very strong expectations for the December quarter, which may have been related to the Rugby World Cup, did not materialise,” he said.

Inventories were building up due to weakening retail sales, which may point to weaker activity through the current March quarter.

The survey showed slowing momentum, but was still positive for the economy.

“Firms report continued hiring and positive hiring intentions. This is encouraging, given a darkening global economic backstop,” Eaqub said.

Canterbury was rebounding from the disruptions caused by the earthquakes as investment intentions soared as firms sought to replace lost capital. The survey was conducted before the series of aftershocks on December 23.

However, only businesses still operating in Canterbury responded to the survey, meaning figures on the region could be more optimistic than the situation actually was.

“Building, plant and machinery investment intentions have surged, but they are slowing elsewhere in the country. There is some evidence of capacity pressures emerging in Canterbury, particularly in the construction sector,” Eaqub said.

“Outside of the construction sector, easing costs and pricing intentions suggest inflation will be contained over coming quarters. Activity indicators are slowing outside of Canterbury,” he said.

“Heightened global tensions are affecting confidence. The RBNZ is clearly mindful of these risks and the OCR is likely to stay unchanged at 2.5% for some time.”

Economist reaction

ASB economist Daniel Smith said the decline in business confidence was not unexpected, given the ongoing turmoil in global markets.

"Although firms' own activity indicators held up better than their general perceptions of the business climate, they were still weaker than in Q3. This shows that the domestic economy remains weak. Overall, we expect the slow economic recovery to continue," Smith said.

"The generally weak inflation indicators suggest that the RBNZ will be under no pressure to raise interest rates for the foreseeable future. However, capacity constraints do appear to be building and this will likely continue as the Canterbury rebuild gets under way later in the year," he said.

"Given the currently low domestic inflationary pressures and the uncertain global environment we continue to expect that the RBNZ will leave interest rates on hold until December 2012."

ANZ economists said although pricing pressures had eased, they had not dissipated altogether. The net balance of firms experiencing higher average costs remained high at 30%, and with profitability falling there was limited scope to absorb cost increases without lifting prices, they said.

"Of some concern for the RBNZ, capacity measures did not ease as many had been expecting, although this was largely due to Canterbury.  Both capacity utilisation and capacity as a limiting factor measures lifted. We expect this totranslate into a firming in domestically generated inflation towards the end of the year, provided that the economy strengthens," ANZ economists said.

"Barring global meltdown, the next move in the OCR is up, but the RBNZ have considerable time on their side," they said.

BNZ economists said the build-up in inventories was not a good sign for near-term GDP figures. However, they noted the QSBO did not cover the rural sector very well, and that the dairy and meat sectors were in "fine fettle" at the moment.

"The other positive worth pointing out, by way of reference to the QSBO, is the economy’s resilience to the ructions and uncertainties pervading the global economy. For instance, manufacturing sector respondents reported a pickup in export sales over the last three months, and with expectations even stronger. Dragging the chain was domestic sales," BNZ economists said.

"Turning to inflation, today’s QSBO had principally good news, in that business pricing measures continued to moderate, as did the tendency in cost pressures. This is all the more interesting, given the construction cost pressures already evident in Canterbury. It implies the wider inflation pulse might be softer still. Another example how important it’s becoming to consider Canterbury and the rest of the country separately in their economic trends, rather than lumping their positives and negatives together into an unexciting average," they said.

(Updates with economist reactions, video interview with Eaqub)