OCR expected to drop to 0.5

Coins in wrench sitting on calculator

The latest NZIER quarterly survey of business opinions suggest that GDP could fall below 1% later this year. Business confidence is said to be at an all-time low since the Global Financial Crisis and GDP annual gross is slipping further so cuts in the OCR may be needed to stimulate activity.

Banks' economists are suggesting that two more OCR cuts may happen between now and next May, and that a cut in November is now a must.

Kiwibank's chief economist, Jarrod Kerr commented: "after the decidedly mixed response to the 50bp OCR cut, we expect the RBNZ will revert to smaller 25bp steps. However, another double cut is possible as business confidence is crumbling".

This is what the statement from NZIER said today:

The latest NZIER Quarterly Survey of Business Opinion (QSBO) shows a further drop in business confidence in the September quarter. A net 35 percent of businesses expect a worsening in general economic conditions – still the weakest level since March 2009.There was also a decline in firms' own trading activity, which is a better indicator of demand in the New Zealand economy. The net 11 percent of businesses reporting demand fell over the quarter brings this measure to its weakest level since September 2010. The result suggests annual GDP growth will ease below 1 percent later this year.

Manufacturing sector remains the most pessimistic

Although there was some improvement in sentiment amongst manufacturers, the manufacturing sector remains the most downbeat of the sectors surveyed. The continued weakening in both domestic and export demand continues to weigh on profitability in the manufacturing sector. The continued uncertainty over how the trade war between the US and China will play out is dampening manufacturing demand globally. We expect this uncertainty will remain a headwind for the manufacturing sector over the coming year.Meanwhile, there are signs construction demand is slowing. Building sector firms have lowered their output expectations, while the measure of architects' activity in their own office points to a reduced pipeline of residential and commercial construction. This is consistent with the drop in firms' intentions to invest in buildings over the coming year.Retailers are also more downbeat in the face of weaker demand. Profitability in the retail sector is at the weakest level since September 2009, as retailers struggle to pass on rising costs by raising prices.

Firms more cautious about expanding

The combination of intense cost pressures and weak pricing power continues to weigh on profitability across most sectors. This is making firms more cautious when it comes to hiring and investing. A net 10 percent of firms cut staff numbers – the weakest level in this hiring measure since September 2012. Added to the cautious tone was the decline in investment intentions for buildings and plant and machinery, with both measures reaching their lowest levels since September 2009.

Firms downbeat across all regions

The downbeat mood was prevalent across all regions, but the provinces were particularly pessimistic. Over half of businesses on the West Coast and Nelson expect a deterioration in general economic conditions over the coming months.

Sourced from NZIER’s website.

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