Business confidence at 20 year low

Business confidence has slumped to its lowest level since before the 1987 sharemarket crash, the New Zealand Institute of Economic Research (NZIER) said today in its quarterly survey of business opinion (QSBO).

The independent think tank said a net 61 per cent of firms expected conditions to deteriorate over the next six months.

That compared with a net 32 per cent of pessimists in the last survey in October. Not since March 1986 has the economy's mood been so downbeat. NZIER director Brent Layton said the survey increased the likelihood of a recession.

The seasonally-adjusted figure was even more dire with a net 71 per cent pessimistic against 34 per cent in October. This is the most pessimistic in 35 years and possibly of the 45-year history of the survey, one of the most respected in the country.

The silver lining of this could be that the Reserve Bank may hold off hiking interest rates again next week, when it reviews the Official Cash Rate.

"The results of this QSBO survey suggest the economy is presently in the throes of a potential acute slowdown," Dr Layton said.

Although it pointed to a recession, it was not likely to be a deep one, he said.

The economic landing would be harder than expected three months ago and even harder if the Reserve Bank hiked interest rates again.

Dr Layton advised Reserve Bank governor Alan Bollard, "to sit on his hands".

While inflation was likely to hover near the top of, or above, the Reserve Bank's 1-3 per cent inflation target, it could afford to hold off and then gradually loosen monetary conditions this year and next.

"Slowing domestic demand will reduce the underlying inflationary pressure, further interest rate rises will exacerbate the sharpness of the downturn which is already clearly underway," he said.

Bank economists agreed.

"There's certainly sufficient in there to give the Reserve Bank pause for thought," said National Bank economist John Bolsover.

The slump in confidence was across all regions and all industries.

Firms that operate nationwide and manufacturers were most pessimistic.

The South Island was more pessimistic than the north. A seasonally-adjusted net 5 per cent of firms reported a decline in their own trading activity over the past three months -- the most negative recorded since the December 1998 survey conducted during the Asian financial crisis.

A net 9 per cent of firms expected their own activity to decline in the next quarter, the most negative for eight years.

Intentions to increase staff have turned negative for the first time in 5 years. "Despite pent-up labour demand, it is possible firms will stop hiring which would exacerbate the slowdown," NZIER said.

However, widespread difficulty in finding skilled and unskilled labour remained, although less than in the previous survey. Only a net 33 per cent of firms experienced trouble finding skilled staff against 61 per cent in October.

Capacity utilisation, closely watched by the Reserve Bank as an indicator of how the economy is running, was still historically high at 91.5 per cent but slightly down on the 91.9 per cent in the previous survey.

What may concern the Reserve Bank is that cost and price pressures remain strong, a net 23 per cent of firms increased prices in the last three months and a net 33 per cent intend to hike prices in the next quarter.

A net 41 per cent experienced cost increases in the last three months and 42 per cent expected cost increases in the next three months.

- NZPA