New Zealand First Quarter Business Confidence Slumps Following Earthquake

New Zealand business confidence slumped to a two-year low in the first quarter after an earthquake killed at least 170 people and forced companies to close in the nation’s second-largest city.

A net 27 percent of 690 companies surveyed expect the economy will deteriorate over the next six months, from a net 8 percent expecting an improvement in the previous survey, the New Zealand Institute of Economic Research said today in Wellington. The net figure, which isn’t adjusted for seasonal patterns, is calculated by subtracting the proportion of pessimists from optimists.

Falling confidence adds to signs the economy will experience little growth in the first half of the year after the magnitude 6.3 earthquake that struck Christchurch in the province of Canterbury on Feb. 22. Central bank Governor Alan Bollard to cut the official cash rate by a half a percentage point last month to aid a recovery from the temblor.

“The earthquake was disruptive but outside of that the economy was flat,” Shamubeel Eaqub, principal economist at the institute, told reporters today. “Profits are still very weak. Businesses are getting a huge squeeze on their margins.”

Ten of 14 economists surveyed last month forecast Bollard will keep the benchmark interest rate at 2.5 percent until next year. Four expect an increase in the fourth quarter. Eaqub doesn’t expect a move until 2012.

Profitability

Businesses reported that sales and profits declined in the first quarter, adding to signs of minimal growth in gross domestic product, today’s report showed. The economy shrank 0.2 percent in the third quarter last year and grew 0.2 percent in the final three months of the year.

A net 6 percent of companies said trading weakened in the three months ended March 31, the institute said. A net 28 percent said profits fell, increasing from 21 percent three months earlier.

Sentiment toward the second quarter is also weak, according to today’s survey. A net 22 percent of firms expect profits will fall, from 5 percent in the previous survey.

Investment intentions remain flat, today’s report showed. A net 7 percent planned to spend less on buildings in the next quarter from 8 percent. Employment intentions are also little changed.

Economists monitor the institute’s report to gauge whether inflation pressures will emerge. Bollard said last month he expected medium-term inflation to stay within the 1 percent to 3 percent range that he is required to target.

Rising Costs

Current inflation pressures are subdued because demand is weak and firms cannot pass on rising costs, Eaqub said.

Forty-four percent of companies expect costs will increase in the second quarter while 14 percent were able to raise prices in the first quarter, today’s report showed. A net 14 percent of firms plan to raise prices over the next three months.

“Profitability is being eroded by rising costs,” Eaqub said. “Building cost pressures and a tightening labor market suggest medium-term inflationary pressures are emerging.”

A net 10 percent of companies said it is harder to find skilled workers, up from 7 percent in the previous survey.

Capacity utilization, a measure of factory usage, was little changed at 89.4 percent in the first quarter from 89.0 percent in the previous three months.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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