November NBNZ Business Outlook: Pessimism runs wild

Posted by: Matt Nolan on: December 8, 2008

In: New Zealand Economics
4 Comments

A couple of weeks ago the November NBNZ Business Outlook survey was release – and man was it a stinker.

The key point was the decline in own activity expectations – with a net 14% of firms expecting their own level of activity to contract! In conjunction with the RBNZ inflation expectations number (specifically the surveys wage growth measure) this was one of the “green lights” for the massive rate cut in December.

However, I can’t get past the inflation expectation number from the Businesses Outlook, 3.7%. This is with the economy having contracted and petrol prices collapsing. Sure this is a slow moving measure – but it is moving in the wrong direction!

I realise that anyone reading probably cannot understand why I still care about inflation (as seen here) – but I’m afraid that can’t see a massive build up of spare capacity in New Zealand, I don’t see any “demand deficiency”, or “savings glut” (although who knows – maybe I’m suffering from recession fatigue). Without this, all the Bank can do is focus on its mandate to keep price growth low and stable.

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4 Responses to "November NBNZ Business Outlook: Pessimism runs wild"

1 | Miguel Sanchez
December 8, 2008 at 4:21 pm

That bugged me too, though I suspect that trying to explain all of the monthly variations in this survey is the quickest path to madness. But I wonder if businesses are seeing some imported inflation, as per this article?

http://www.businessday.co.nz/personal_finance/4783707

2 | Matt Nolan
December 8, 2008 at 4:30 pm

“That bugged me too, though I suspect that trying to explain all of the monthly variations in this survey is the quickest path to madness”

Very true – it must be tough for them having to write about it every month 🙂

I would note that this survey number has been elevated for a while though – the measure of inflation expectations is stuck above 3.5%

“But I wonder if businesses are seeing some imported inflation, as per this article?”

They could well be – and it makes complete sense. However, I would have expected the sharp fall in petrol prices to dominate their outlook at the current moment – very interesting.

3 | DG
December 8, 2008 at 6:38 pm

I pay far more attention to the own selling prices indicator in this survey. Firms have a much better handle on their own pricing than on pricing in the broader economy. I think the 1-yr ahead inflation expectation is meaningless….it is a coincident indicator at best. With measured inflation at 5.1% I’m not surprised to see 1-yr inflation expectations holding up. They will fall as measured inflation falls.

4 | Matt Nolan
December 9, 2008 at 12:03 pm

“I pay far more attention to the own selling prices indicator in this survey. Firms have a much better handle on their own pricing than on pricing in the broader economy”

Agreed. However, the disadvantage of the selling price indicator is that it is discrete and incredibly short term – it is selling us that some proportion of firms aim to lift prices in a three month horizon. Now, if these are all input firms you can bet that it will flow into inflation later on 🙂

Furthermore, because of the short horizon a fall could indicate that firms are expecting a short, sharp decline – and will look to get back into price increases later in the year.

“I think the 1-yr ahead inflation expectation is meaningless….it is a coincident indicator at best”

Agreed but … the NBNZ inflation expectations series has been remarkably stable over time – even as headline inflation has swung wildly. With the knock to fuel prices I would have expected a decline in this figure (like the 2-year ahead survey of expectations measure) – but instead it kept rising!