Slow second half forecast as confidence and activity slide

"The recovery remains disappointing," principal economist NZIER Shamubeel Eaqub says. "Auckland is growing, but the post-quake surge in Canterbury is moderating and activity elsewhere is slowing."

BUSINESSDESK: New Zealand's economic growth is poised to slow in the second half of the year as local businesses got gloomier in the third quarter in a deteriorating trading environment, the New Zealand Institute of Economic Research says.

The Wellington-based consultancy sees the pace of annual growth slowing to 1.5% in the second half of the year from a pace of 2.6% at the end of June, based on a more pessimistic outlook in the September quarterly survey of business opinion.

A net 5% of firms surveyed were pessimistic about the general business situation, worse than a net 1% in the June quarter and a net 7% experienced slower trading activity in the period compared to a flat rate in the prior quarter.

"The recovery remains disappointing," principal economist Shamubeel Eaqub says. "Auckland is growing, but the post-quake surge in Canterbury is moderating and activity elsewhere is slowing."

New Zealand's economy grew 0.6% in the June quarter on the strength of domestic milk production and increased building activity, following on from a 1% pace of quarterly expansion in the first three months of the year.

Today's QSBO showed local manufacturing activity slowed sharply, with a net 26% surveyed experiencing lower output from a net 3% a quarter earlier, while services showed an unexpected deterioration, with a net 14% decline in volume of services from a net 2% decline in the June period.

Mr Eaqub says the manufacturing slowdown was probably caused by the big build-up in inventories last year after strong climatic conditions stoked dairy production, though it was not limited to food producers and may reflect a slowing Australian economy.

Labour conditions softened in the quarter, with a net minus 9% in employment compared to a net minus 4%, while hiring intentions were unchanged at a net 4% of firms expecting to take on new staff.

"Nothing feels particularly nice on the economic front – it doesn't look like we're heading into recession, but it doesn't look like the acceleration in the economy is going to continue," Mr Eaqub says.

A net 15% of financial services firms expect interest rates to rise in the coming year, turning around from a net 6% picking a cut.

Mr Eaqub says he does not expect the Reserve Bank to move the 2.5% official cash rate soon and that it will take a major deterioration in the global economy or signs of inflation starting to rise to see rates cut.

Inflationary pressures remain subdued and are consistent with the consumer price index staying in the middle of the central bank's target band of between 1% and 3%.

A net 21% of firms experienced smaller profits compared to a net 13% in the June quarter, though a net 3% of companies are picking better earnings.

Building investment intentions were unchanged at a net minus 3% in the quarter, while machinery and plant investment intentions deteriorated to a net minus 1% from a net positive 2%.

Retailing continues its gradual improvement, with a net 4% experiencing better sales, compared to a net 2%  seeing smaller sales in the previous quarter. The bulk of those gains in the sector were in Auckland, Mr Eaqub says.