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NZIER's QSBO finds flat economy in Q1; activity stable outside Christchurch, but demand weak and costs building. Your experience?

NZIER's QSBO finds flat economy in Q1; activity stable outside Christchurch, but demand weak and costs building. Your experience?

The New Zealand Institute of Economic Research's (NZIER)'s Quarterly Survey of Business Opinion (QSBO) found economic activity was broadly flat in the March quarter, but cost pressures are building and domestic demand remains weak. The NZIER said the Reserve Bank can afford to leave the Official Cash Rate on hold at 2.5% for the rest of 2011. Economists said after the survey they saw no need for an OCR hike by the Reserve Bank until next year at the earliest.

See the NZIER release below:

Flat, despite earthquake disruption

NZIER’s Quarterly Survey of Business Opinion (QSBO) shows flat economic activity in the March 2011 quarter, despite significant localised disruption following the Canterbury earthquake. Firms’ experienced trading activity eased from -1% to -5% on a seasonally adjusted basis.

“Economic and employment conditions are stable outside of Canterbury, but there are some warning signs. Profitability is being eroded by rising costs while prices are restrained by weak demand. This is limiting new investment and the recovery. Rising overdue debtors, increasing inventories and barely any recovery for small firms suggest the economy is still fragile,” said Shamubeel Eaqub, Principal Economist at NZIER.

Initial earthquake impacts: weak profits and likely job losses

Trading activity continued to contract in earthquake-affected Canterbury (-28% from -33%), while the rest of New Zealand slowed modestly (-2% from +4%). The weakness in Canterbury activity is understated as 40% of the potentially worst hit firms were unable to respond to the survey. Accounting for this, we estimate domestic trading activity in Canterbury may be closer to -55% (from -33%). Service and retail sector firms were most affected. The same industries expect the June quarter to be very difficult.

Expected reconstruction led to a surge in building investment intentions in Canterbury (+38% from -6%; rest of New Zealand eased from -9% to -13%). Profitability fell sharply in Canterbury (-52% from -21%; rest of New Zealand softened from -21% to -25%). Hiring intentions have fallen sharply in Canterbury (-15% from +10%; rest of New Zealand stable at +3%), which may indicate impending job losses.

Inflationary pressures building

Inflationary pressures eased from already subdued levels, both in prices charged and expected prices. Lack of demand continues to be the key constraint for firms. Increasing costs are eating into margins rather than being passed on to consumers. However, building cost pressures and a tightening labour market suggest medium term inflationary pressures are emerging. Current weak inflation and sluggish economic activity mean the RBNZ can hold the OCR at 2.5% for the rest of 2011.

Here's ASB Economist Christina Leung's reaction:

The decline in business confidence was broadly in line with the results of the monthly NBNZ business survey for March. The effects of the major Christchurch earthquake are reflected in a broad range of measures, and points to weak economic activity over Q1 2011. Against this backdrop, costs have risen for many businesses. This is likely to be the result of the increase in petrol prices in recent months.

The fact that many businesses feel they cannot pass on these rising costs highlights the pressures on margins at the moment. While inflation indicators remain low for now, inflation pressures are likely to build once the recovery gathers momentum over 2012. In cutting the OCR by 50 basis points at the March MPS, the RBNZ had already pre‐empted the decline in confidence that would ensue following the earthquake. As such, we do not expect any further monetary policy stimulus.

We expect the RBNZ to raise the OCR from current emergency low settings of 2.50% in March next year, as rebuilding activity underpins a recovery in activity.

Here's JP Morgan's Helen Kevan's reaction:

Trading activity held up reasonably well outside of Canterbury (-2% from 4%), but trading activity in earthquake-affected Canterbury worsened further (-28% from -33%), having already fallen significantly in the aftermath of the first earthquake in September last year. The NZIER highlighted, however, that the weakness in trading activity in Canterbury may have been understated, given that 40% of the “potentially worst hit firms” were unable to respond to the survey. Those in the construction sector were more optimistic as one would expect, with the survey showing a surge in building investment intentions in Canterbury (+38% from -6%), whereas building intentions elsewhere eased (-9% to -13%).
 
With firms continuing to face cost increases, profitability worsened over 1Q (from -21% to -28%) and 22% of firms expected profitability to worsen in the current quarter. Despite increasing costs, fewer firms increased selling prices in 1Q (12% to 11%), and only 14% of firms expected to raise selling prices in the June quarter due to weak domestic demand. With firms’ profits taking a hit as margins continue to be squeezed, new investment will remain limited. Indeed, investment plans were weak in 1Q, with 7% of firms expecting to rein in investment on buildings in the next 12 months. Hiring intentions also have weakened – no firms are expecting to increase staff in 2Q, compared to 4% in the previous quarter.
 
The easing of inflationary pressures from already subdued levels reaffirmed our view that the RBNZ will sit on the policy sidelines for the remainder of the year. The capacity utilisation rate rose in 1Q (from 89.0% to 89.4%), but is still running around its long run average, and is yet a reason for concern. Indeed, with firms unable to pass on higher costs to consumers, underlying inflation benign, and inflation expectations anchored, the RBNZ will be able to sit comfortably on the policy sidelines for the remainder of the year, awaiting evidence in early 2012 that the reconstruction phase is underway.

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7 Comments

 "...building cost pressures and a tightening labour market suggest medium term inflationary pressures are emerging.".....

Gosh whatever could be causing this to happen.....and the Chch rebuild pricing rorts have yet to start...feck me we are in for a whale of an inflation wave...aint that right Bolly.....BOLLY....I see him I see him...he's sprinting up the Terrace...run you banker run.

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Thats only part of it, they are wasting so much money in Christchurch that activity in dollars terms will reduce to lesser degree than people expect however starting to see a lot more layoffs outside Christchurch(last two weeks) because of the earthquake and general economic conidtions, in particluar around the south Island.

Auckland static with the people I work with there.

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Here's ASB Economist Christina Leung's reaction:

The decline in business confidence was broadly in line with the results of the monthly NBNZ business survey for March. The effects of the major Christchurch earthquake are reflected in a broad range of measures, and points to weak economic activity over Q1 2011.

Against this backdrop, costs have risen for many businesses. This is likely to be the result of the increase in petrol prices in recent months. The fact that many businesses feel they cannot pass on these rising costs highlights the pressures on margins at the moment. While inflation indicators remain low for now, inflation pressures are likely to build once the recovery gathers momentum over 2012.

In cutting the OCR by 50 basis points at the March MPS, the RBNZ had already pre‐empted the decline in confidence that would ensue following the earthquake. As such, we do not expect any further monetary policy stimulus. We expect the RBNZ to raise the OCR from current emergency low settings of 2.50% in March next year, as rebuilding activity underpins a recovery in activity.

 

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Talking about costs...   I came across some of my old relicencing invoices...  latest one is $650...   A couple of yrs back it was $420......   4-5 yrs back it was less than $200.

 

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Updated with JP Morgan's Helen Kevans saying no need for a rate hike until next year.

cheers

Bernard

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You're a " rate hik " .......... old Hike-it-Hickey !

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hic....

and I haven't even had anything to drink yet...

now what I need is those alcoholic gummy bears.

Seen any?

cheers

Bernard

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