Interest rates may go up despite depressed confidence

Sunday Star Times

NON CONFIDENT: New Zealand has ranked poorly in a recent international survey of business confidence.

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Business confidence remains deeply depressed but not only is there no reason for interest rates to be cut, they may even be hiked again, NZIER said.

The New Zealand Institute of Economic Research's latest quarter survey of business opinion showed a net 26 per cent of firms expect the general business situation to deteriorate in the next six months, virtually unchanged from the September quarter survey.

On a seasonally adjusted basis, the picture is grimmer, with a net 38 per cent expecting a deterioration against 30 per cent in the previous quarter.

Any thoughts this might lead Reserve Bank Governor Alan Bollard to take his foot off the economic brakes were quashed by data showing pricing intentions and expectations going in the wrong direction and an already tight labour market tightening another tick.

Dr Bollard would have no grounds to feel he had inflation on the run, institute chief executive Brent Layton said.

"They won't be making that conclusion out of this set at all. The expectations that I think you take out of this survey is longer, rather than sooner."

There was a 30 to 40 per cent chance Dr Bollard would hike interest rates again this year.

Today's survey had not reduced that probability, Dr Layton said.

Pessimism about the outlook for the general business situation was widespread among firms.

Factories running near flat out, labour shortages, pricing and cost experiences and intentions all suggested strong inflation pressures remain.

The survey comes amid market pessimism about the international economy due to the international credit crisis that threatens to push the United States economy into recession.

The local sharemarket has lost 5 per cent in two weeks, and yesterday hit a 14-month low.

Consumer price data out tomorrow is expected to push the annual inflation rate right to the top, or above, the bank's 1 to 3 per cent target band.

On a more positive note, a net 6 per cent of firms on a seasonally adjusted basis reported an increase in their own activity, against 2 per cent last quarter.

A net 12 per cent expected their own trading activity to increase in the next quarter, down from 13 per cent in the previous quarter.

Manufacturers were generally more positive about the outlook than before, but still a net 35 per cent expect the general situation to deteriorate, against a net 22 per cent in Australia who expect an improvement.

Local manufacturers have been gloomier than their Australian counterparts for the last six years but this is the largest differential since 1990.

The outlook for the construction industry improved slightly with a net 40 per cent expecting output to rise.

Merchants were also reasonably positive with a net 7 per cent expecting an increase in new orders and a net 11 per cent expecting an increase in local sales.

There is little likelihood of an easing in the labour market. A net 14 per cent of firms intend to increase staff against 4 per cent that actually increased staff in the last quarter.

The net balance of firms reporting greater difficulty finding labour is up for both skilled and unskilled.

On the pricing front, the net balance of firms intending to increasing prices in the next three months remained virtually unchanged at 34 per cent. Those expecting a rise in costs rose to a net 49 per cent, from 44 per cent in September.

A net balance of firms reporting a decline in profitability was unchanged at 19 per cent.

- NZPA