KEY POINTS:
Expectations are growing that the Reserve Bank will cut the official cash rate by another full percentage point on January 29 after business confidence plunged to a 39-year low.
Economists used words like "dreadful", "terrible" and "dire" to describe the results of the New Zealand Institute of Economic
Research's latest quarterly survey of business opinion.
The only good news in the survey, they said, were the indicators of inflation pressure, which have dropped sharply, suggesting there is nothing to give Reserve Bank Governor Alan Bollard pause as he contemplates the next interest rate cut.
Financial markets regard a 75-basis-point cut to the official cash rate this month as a done deal and are pricing in a 90 per cent chance of a 100-point cut, which would lower the OCR to 4 per cent.
A net 43 per cent of firms reported a drop in their own activity over the last three months of 2008. That is down from a net 32 per cent in September.
A similar proportion - a net 43 per cent - expect a further decline in activity in the next three months. Both readings are the weakest since March 1970.
Firms are also deeply gloomy about the general business situation. A net 64 per cent expect it to deteriorate over the next six months, down from a net 19 per cent pessimistic in September.
The decline in confidence was across the board, with all sectors and regions recording falls in general sentiment, their own trading activity and profitability and in their employment and investment intentions, the institute said.
Among retailers the numbers were particularly bad, with a net 53 per cent reporting lower sales in the past three months and a net 53 per cent expecting further decline in the March quarter.
Retailers' profitability expectations are at a 26-year low. A net 32 per cent report reducing staff numbers over the past three months and a net 43 per cent expect to do so in the current quarter.
Overall the labour market indicators are the weakest since 1991.
In the September survey a net 7 per cent of firms said they expected to cut staff numbers. In the event a net 21 per cent did so, and now a net 32 per cent say they expect to over the next three months.
Investment intentions are also weak. A net 39 per cent of firms say they expect to invest less in plant and machinery over the next 12 months, the weakest reading since NZIER started asking this question in 1975.
The flipside of the survey's feeble activity indicators is a sharp fall in its inflation gauges. A net 3 per cent of firms say they intend to cut their selling prices over the next three months. That is the weakest reading for 10 years and is consistent with little or no inflation by the second half of this year.
A net 17 per cent of firms say it has become easier to find skilled labour and a net 43 per cent say it is easier to find unskilled labour - in both cases the highest since 1991.
ANZ National Bank economist Philip Borkin said these results suggested the strong wage rises of recent years were at an end.
Another pressure on the economy's resources has also eased - the utilisation of manufacturers and builders' plant and equipment is at the lowest level since the 1998 recession.
Almost all the survey's responses came in after the Reserve Bank cut the OCR 150 basis points on December 4, bringing its total easing since July to 325 points.
The fact that the survey indicators had deteriorated so sharply even after such aggressive policy action testified to how powerful the forces influencing the economy were, Borkin said.
"It is clear that the Reserve Bank has more work to do."
So does the Government, says UBS economist Robin Clements.
Accepting a sizeable fiscal stimulus through tax cuts and infrastructure spending is already in train - amounting to around 5 per cent of GDP over 2009 and 2010 - there was still a need for some tangible action to break the downward spiral, Clements said.
He suggested a cut to fuel taxes, which make up more than 40 per cent of the price at the pump, as something that could be done quickly, would have a widespread effect and could be easily reversed when appropriate.