New Zealand Profit Expectations Slump to 25-Year Low

By Tracy Withers

July 8 (Bloomberg) -- New Zealand companies say sales and trading will decline in the third quarter, pushing profit expectations to a 25-year low, as economic growth slumps.

A net 23 percent of firms expect domestic trading will decline over the next three months compared with 10 percent in the previous poll, the New Zealand Institute of Economic Research said today in Wellington. A net 40 percent of 923 businesses surveyed last month said profits will fall, the most since December 1982.

Weak profit expectations and spending plans suggest the economy may have slumped into a recession after it contracted in the first quarter. Reserve Bank Governor Alan Bollard last month said it is ``likely'' he will cut interest rates from a record- high 8.25 percent this year as economic growth slows.

``Indicators of domestic trading suggest economic activity declined further in the second quarter and is likely to decline again in the third quarter,'' Brent Layton, chief executive at the institute, told reporters. ``Companies are saying the slowing economy has affected us and will continue to do so.''

New Zealand's dollar bought 75.34 U.S. cents at 10:07 a.m. in Wellington from 75.31 cents immediately before the report.

The Treasury department yesterday cut its forecast for economic growth in the year to March 31, 2009, to about 1 percent from 1.5 percent. That would be the slowest annual growth since 1998. Gross domestic product shrank 0.3 percent in the three months ended March 31.

Economic Outlook

Twelve of 13 economists surveyed by Bloomberg say Bollard will lower borrowing costs before Sept. 30. One expects a rate cut in October.

Pessimism about the overall economy was unchanged at a 33- year low, today's report showed. A net 64 percent of companies say the economy will deteriorate in the next six months, matching the previous survey.

The net figure is calculated by subtracting the pessimists from optimists.

Companies are less likely to invest and more likely to fire workers in the next three months, the institute said. A net 71 percent expect their costs will increase.

A net 49 percent of companies surveyed said they are likely to raise prices in the next three months from 45 percent in the March survey. That's the highest since March 1987 and suggests annual inflation may exceed 4 percent, the institute said.

Skilled Workers

Economists closely watch the business survey, monitoring the rate of capacity utilization, which measures how much plant, equipment and labor is employed, and the difficulty in finding workers, to gauge inflation pressures in the economy.

Capacity utilization fell to 92.4 percent from 92.6 percent in the first quarter, the institute said.

A net 19 percent of companies surveyed said it was harder to find skilled workers than three months earlier. That's down from 36 percent in the previous survey and is the lowest since June 1999.

While indicators of labor shortages have eased, other gauges of inflation pressures ``suggest strong inflationary pressures will persist,'' the institute said.

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