New Zealand's economy is heading towards a "serious crunch'' or a "grinding halt'', according to economists analysing a quarterly survey of business opinion which indicates a 33-year low in business confidence.
In spite of the low-to-negative growth predictions, inflationary pressures remained intense and the Reserve Bank was likely to hold its rates at present levels - still the highest in the developed world.
The quarterly survey of the New Zealand Institute of Economic Research, released yesterday, revealed the "own activity'' expectations of businesses were consistent with no growth in the first quarter of the year, Westpac chief economist Brendan O'Donovan said yesterday.
"The [NZIER] quarterly survey of business opinion suggests the economy is set for a serious crunch this year, but that inflation pressures nonetheless remain intense,'' Mr O'Donovan said in a statement yesterday.
He said headline general business confidence fell to a 33-year low, noting profitability continued to be squeezed by rising costs, sales figures were down as consumers spent less and the situation and effects of foreign-market jitters and global credit crunch remain "dubious''.
"A shocker was expected after sharp falls in monthly business confidence but this was startling none the less,'' he said.
Economists believe the Reserve Bank will not ease its stance on rates, initially raised to quell mounting debt from the booming residential housing market and sparking inflation fears. This is evident with inflation threatening to teeter over the bank's outer target limit of 3%.
"The Reserve Bank is in a tough spot. For now we're picking they will steel themselves and hold rates firm, given inflation pressures and the still strong fundamentals for medium-term [economic] growth,'' Mr O'Donovan said.
The survey said, on a seasonally adjusted basis, a net 56% of firms expected the general business situation to deteriorate in the next six months - the highest level since December 2005 and up from 38% in December 2007, NZPA reported.
Firms "own activity'' expectations did not decline as much as headline confidence but the drop was to the lowest levels seen since the 1998 recession.
Excluding seasonal adjustment, the balance of firms expecting the general business situation to deteriorate in the next six months was 64%, compared with 26% in the December survey.
ANZ chief economist Cameron Bagrie said all forward-looking indicators "deteriorated sharply'' in the quarter to March, with the domestic trading activity indicator suggesting GDP for the quarter could be flat to slightly negative.
"The results are consistent with economic activity coming to a grinding halt in the first half of 2008,'' Mr Bagrie said in a statement.
He said a "negative gloom'' had descended on businesses in recent months, prompted by high interest rates, the high New Zealand dollar and the cost of international credit.
The positives from the corporate tax rate falling to 30% and the potential for tax cuts from the budget were being dwarfed at present, he said.
"Equity markets are under pressure, the housing market is weak and looks to be broadening into the retail sector, and petrol prices continue to hit new record highs,'' Mr Bagrie said.
A net balance of 45% of firms intended to increase prices in the next three months, the highest level since March 1987, and up from 35% in December, NZPA reported.
"The price and cost-related data will increase the discomfort of the Reserve Bank about pricing intentions and inflationary expectations,'' a spokesperson for NZIER said.
No firms intended to increase staff in the next three months, compared with 4% which actually increased staff in the past three months and 14% of firms which had planned to increase staff in the previous survey.
Fewer firms reported greater difficulty finding labour, either skilled or unskilled, although at a level that suggested relatively high difficulty by historical standards, according to NZIER.
