Economists are expecting the Reserve Bank to be paying close attention to the concerns of businesses as ongoing pessimism may lead to lower economic growth.
This could, in turn, see the Central Bank delay increases to the Official Cash Rate (OCR) from its 1.75% record low.
On Tuesday, the New Zealand Institute of Economic Research’s (NZIER) business confidence numbers showed a net 19% of firms expect an economic deterioration in the coming months, up from 10% last quarter.
“We expect the Reserve Bank will take note of the fall in business confidence, and like us, will consider revising its 2018 Gross Domestic Product (GDP) growth outlook [for the second half of the year] lower,” says ASB senior economist Jane Turner.
In its OCR statement last week, the Reserve Bank made no mention of the falling sentiment.
But given Tuesday’s figures, as well as a string of poor results from ANZ’s business confidence index, it is more likely Governor Adrian Orr will address the issues in his August 9 Monetary Policy Statement (MPS).
“The Reserve Bank cannot ignore the recent cooling in business sentiment,” says Kiwibank chief economist Jarrod Kerr.
He says the pullback in business confidence, as well as business’ forecasts for their own trading activity, are red flags for economic growth.
“There is a real risk that New Zealand’s growth will fall below potential over coming quarters.”
Westpac senior economist Anne Boniface says the data shows the pace of activity in the New Zealand economy has dropped down a gear.
“It also supports the view underpinning our forecasts that this softer growth backdrop, combined with weaker confidence, will lead to a temporary lull in hiring and investment this year.”
Finance Minister Grant Robertson does not see business confidence having an impact on GDP growth throughout the rest of the year.
In the March quarter, GDP came in at 0.5% compared to the quarter prior; 0.2% lower than Reserve Bank forecasts.
“From the projections we’re seeing in the second and third quarters of this year, growth will be better,” Robertson says.
He points to fiscal stimulus in the form of the Government’s $5.5 billion families package, which took effect on Sunday, as one reason for his optimistic forecast.
Investment intentions – ignore at your own peril
The NZIER data shows business investment intentions – which Robertson says has a closer link to GDP growth than confidence levels – plunged over the June quarter.
In a note released before the data this morning, ANZ senior economist Phil Borkin said when it comes to what firms are saying about their own activity, it is a case of “ignore this information at your own peril.”
In response to ANZ’s numbers last week, ASB pushed out its expectations for the Reserve Bank to hike the OCR from August next year to November.
Although he says it's possible New Zealand’s economic growth levels are at risk, Kerr says there are still a few economic fundamentals that are underpinning the economy.
He says decent population growth, near-record terms of trade, mortgage rates remaining low and expansionary fiscal policy will all help support growth in the second half of 2018.