New Zealand's economic contraction is likely to be deeper than originally forecast, the New Zealand Institute of Economic Research (NZIER) said following its latest Quarterly Survey of Business Opinion (QSBO), which is closely watched by the Reserve Bank. A seasonally adjusted net 47% of firms surveyed reported a fall in their own activity in the March quarter, from a net 44% in December. This the lowest result in the survey since at least 1970. (Update 1 to include responses from economists.) "This measure of activity is a leading indicator of GDP growth and suggests that the GDP figure for the first quarter of 2009 will be as bad as, if not worse than, the 0.9% contraction seen in the last quarter of 2008," NZIER said. The net 47% of firms saying activity dropped over the first quarter of 2009 was worse than what had been expected for the quarter. In the December survey, a net 43% of firms said they expected their business activity to fall in the March quarter. The latest result will put further pressure on Reserve Bank Governor Alan Bollard to cut the Official Cash Rate from 3% on April 30. Economist Gareth Morgan today said that Bollard should not wait until the next scheduled OCR announcement, but should cut the OCR now. Bank economists responded to the result saying it gave further scope for a 50 basis point cut in the OCR at the end of April. A net 38% of firms said they expected a drop in their own activity in the June quarter and a net 65% of firms said they expected general business conditions to worsen over the next six months.
"Firms are reporting that weak sales growth is having a significant impact on their employment and investment decisions," NZIER economists said. "Facing falling demand, firms are now operating at 86.3% of full capacity. They are responding rapidly and rationally to this drop off in activity by trimming costs "“ including their labour and capital inputs "“ and lowering selling prices," NZIER said. A net 34% of firms said they had shed staff over the last 3 months, compared to a net 32% saying in the December survey that they were intending on cutting staff in the March quarter. A net 36% of firms said they were looking at cutting staff in the June quarter. "Labour market indicators have worsened "“ employment intentions are the lowest since late 1991, finding skilled and unskilled labour has become historically easy and overtime worked has been falling for more than a year. Investment intentions for the next six months are the lowest recorded since the series started in 1975, for both buildings and plant and machinery. If these intentions are realised, cutting back on investment now could hold back future growth and make for an even longer and slower recovery." Investment intentions over the next quarter fell to their lowest level since the series began in 1975, with a net 46% of firms saying they expected to reduce investment in buildings over the next year and a net 44% said they expected to cut back on investment in plant and machinery. The NZIER said that 83% of the responses to the latest survey were posted after the Reserve Bank's announcement on 12 March 2009 that it was reducing the OCR by 50 basis points to 3.0%. 97% of the responses to the survey were posted before the announcement on 27 March 2009 of the December quarter's 0.9% decline in real GDP. BNZ responded to the news by saying the New Zealand economy was "falling into a big hole". "While many are musing about rebounds, the NZ business sector has hopefully woken everyone from their reveries today, in its still-disturbing outlook for the economy...It was seriously bad," BNZ economist Craig Ebert said. "Households, meanwhile, would seem less than cognisant about what's about to hit them "“ directly via the labour market and, indirectly. courtesy of the wider ongoing slowdown. And even if their spending is able to hold up, and the housing market is supported by lower interest rates, there would seem serious questions about the durability of it all," Ebert said. "On the monetary policy front, today's QSBO leaves us comfortable in being on the 50 point side of the 25/50 point cut debate for the late-April OCR meeting," he said. Westpac economists said the survey result "seals the economic case for a 50bp cut at the 30 April OCR review." "The QSBO offers little hope that business activity will stabilise in the second half of this year, as the RBNZ forecast in the March Monetary Policy Statement. To add insult to injury, the recent rise in interest rates and the NZD have left overall financial conditions much tighter than the RBNZ was counting on," Westpac economists said. "The biggest unknown is how much weight the RBNZ will place on the perceived need to "retain competitiveness in the international capital markets", which in short means maintaining a margin over Australian interest rates. New Zealand's cash rate is already 25bp below Australia's (though longer-term market rates are substantially higher). That means this afternoon's RBA rate decision will be crucial for the RBNZ later this month," they said.