Stagflation

The NZIER has dropped the ‘S’ Bomb. Stagflation.

New Zealand now joins Venezuela as an economic basket case facing something the world han’t seen since the seventies.

NZIER Quarterly Survey of Business Opinion – Stagflation Underway

Press Release by The New Zealand Institute of Economic Research at 10:10 am, 08 Jul 2008

Results from NZIER’s Quarterly Survey of Business Opinion (QSBO) for the June 2008 quarter paint a picture of negative economic growth and strong, persistent inflationary pressures.

Statistics New Zealand recently reported that real Gross Domestic Product (GDP) fell by 0.3% in the March 2008 quarter. Indicators of domestic trading activity from the latest QSBO suggest economic activity declined further in the June quarter and is likely to decline again in the September quarter which will make it three quarters of negative economic growth in a row.

On a seasonally adjusted basis, a net 18% of firms reported a decline in their own activity and a net 18% expect their trading activity to fall in the next three months. These figures are at their most negative since June 1998 and December 1982, respectively. The movements in the trading activity indicators reflect the movements in real Gross Domestic Product (GDP) closely over time.

Economic growth and domestic trading activity
Quarterly percent change (LHS), net percent seasonally adjusted (RHS)
Source: Statistics New Zealand, NZIER Quarterly Survey of Business Opinion

While there has been a notable easing in the difficulty finding labour, other indicators of inflation (capacity utilisation, pricing and cost experiences and intentions) suggest that strong inflationary pressures will persist, which will increase the Reserve Bank‘s discomfort in relation to pricing intentions and inflationary expectations.

96% of the responses to the latest survey were received within three weeks of the Reserve Bank’s announcement on 5 June that it was leaving the Official Cash Rate (OCR) unchanged at 8.25%. Virtually all the responses to the survey were in the mail before the 27 June release of data showing a 0.3% decline in real GDP in the March quarter. On average, this decline in real GDP was expected by the financial market participants.

CPI inflation and firms’ pricing intentions
Annual percent change (LHS), net percent (RHS)
Source: Statistics New Zealand, NZIER Quarterly Survey of Business Opinion

Although indicators of activity have dropped sharply in the latest survey, indicators of confidence about the general business situation improved slightly. They remain near low levels compared with historical experience, however. On a seasonally adjusted basis, a net 54% of firms expect the general business situation to deteriorate in the next six months. This compares with a net balance of 56% of firms which expected a deteriorating business situation in the March survey. The 56% figure was the highest expecting deterioration since December 2005.

General business situation
Next 6 months, net percent
Source: NZIER Quarterly Survey of Business Opinion

Excluding seasonal adjustment, the business confidence statistic has improved for manufacturers and builders but deteriorated slightly for merchants and service firms. The depreciation of the currency over the quarter is likely to have contributed significantly to the improvement in manufacturers’ confidence. The slowing domestic consumer demand as households have had to deal with increased fuel costs, higher interest rates on mortgages and higher food prices, while paying increased taxation due to fiscal drag, is likely to have been a significant factor in the declines in merchants and service firms’ confidence indicators.

Firms’ own trading activities

? On a seasonally adjusted basis, the net balance of firms reporting a decrease in their own activity in the June quarter was 18%. Last quarter a net 7% reported a decline. The 18% figure is the highest reporting a decrease since June 1998.

? On a seasonally adjusted basis, a net balance of 18% of firms recorded that they expect their own trading activity to decrease in the next three months from its level in the June 2008 quarter. Last quarter the net balance was 8% expecting a decline. This 18% figure is the equal highest expecting a decrease since December 1982. The previous occasion the figure was 18% was March 1991.

Pricing intentions and cost conditions

? The net balance of firms intending to increase selling prices in the next three months has increased. The balance was 45% in the March survey and 49% in the June survey. The 49% figure is the highest since March 1987.

* The net balance expecting an increase in costs has increased from 62% in March to 71% in June. The 71% figure is the highest since December 1986

Expectations about general business situation

* The seasonally unadjusted business confidence statistic remained steady in all of the three geographically based regions we separately analyse. Among the regions there was very little variation relating to the general business situation measure.
Labour market outlook

? A net 6% of firms intend to decrease staff over the next three months, compared with a net 3% of firms that actually decreased staff in the past three months and a net 0% of firms that planned to decrease staff in the last survey.

Employment numbers
Net percent
Source: NZIER Quarterly Survey of Business Opinion

? There has been a notable easing in the difficulty finding skilled and unskilled labour.

? A net balance of 19% of firms reported in the June survey it had become harder to find skilled labour. In the previous survey, the corresponding figure had been 36%. The 19% figure is the lowest since June 1999.

? The net balance of firms reporting it had become harder to find unskilled labour went from 33% in the December 2007 survey to 22% in the March 2008 survey. In the latest survey, the statistic has changed to a net 6% of firms reporting it had become easier to find unskilled labour The previous occasion a net balance of firms reported it had become easier to find unskilled labour was September 1999.

Ease of finding labour
Net percent, past 3 months
Source: NZIER Quarterly Survey of Business Opinion

? The percentage of firms identifying demand (i.e. sales) as the major factor limiting output expansion has increased since the March survey. In the June survey, 59% of firms identified that sales were the major factor, while 34% pointed to supply-side factors (18% labour, 7% capacity, 7% finance, and 2% materials). In the previous survey, 49% identified sales as the major factor, and 44% the supply-side factors.

Limiting factors to increasing output
Percent of firms citing factor as most limiting
Source: NZIER Quarterly Survey of Business Opinion

Capacity utilisation

* In the June 2008 survey, capacity utilisation was 92.4%. This is a small decrease from the 92.6% recorded in the March survey. The March figure was the equal highest rate recorded since the series began in 1961. The previous occasion the figure was 92.6% was in December 2004.

Manufacturers and builders: capacity utilisation
Median utilised capacity, CUBO (capacity utilisation business opinion)
Source: NZIER Quarterly Survey of Business Opinion

Interest rate expectations

? A net 8% of financial services firms expect interest rates to be lower over the next twelve months compared with the year just gone. This figure compares with the net 56% expected interest rates to be higher in the March survey.Zemanta Pixie

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