New Zealand Business Less Pessimistic After Rate Cut

By Victoria Batchelor

Oct. 7 (Bloomberg) -- New Zealand businesses grew less pessimistic about the economic outlook after the central bank slashed interest rates by the most in seven years.

A net 19 percent of companies surveyed last quarter expect the economy will worsen over the next six months, the New Zealand Institute of Economic Research said today in Wellington. That's less than a net 64 percent that forecast a deterioration in the second quarter. The net figure is calculated by subtracting pessimists from optimists.

Central bank Governor Alan Bollard lowered the benchmark rate by a half point to 7.5 percent last month to try to revive an economy that has fallen into its first recession in 10 years. Gross domestic product probably also shrank in third quarter and will contract again in the final three months of 2008, the research institute forecast today.

``The survey is consistent with a softening economy, so aggressive interest-rate cuts are still on the board,'' said Robin Clements, chief New Zealand economist at UBS AG in Christchurch. ``There will be another 50 basis-point reduction this month and further cuts thereafter.''

Companies are firing workers as consumers rein in spending and as a deepening global financial crisis damps demand for the nation's exports.

The economy shrank 0.2 percent in the second quarter after contracting 0.3 percent in the first three months of the year, putting New Zealand in its first recession since 1998.

Dollar Drops

New Zealand's dollar fell to 62.81 U.S. cents at 10:35 a.m. in Wellington from 63.72 cents before the report was released. The 10-year government bond yield was unchanged at 5.78 percent.

A net 32 percent of companies said sales dropped in the three months ended Sept. 30, today's survey showed.

That was the most since 1991 that have reported a decline in trading in a quarterly survey. The net figure, which is seasonally adjusted, is calculated by subtracting those reporting a rise in sales from those seeing a drop.

The Reserve Bank of New Zealand joins central banks in China, Taiwan and Australia in cutting borrowing costs this year as economic growth slows amid a worsening in the global credit squeeze. The central bank cut rates last month and in July, and the next decision is due Oct. 23.

``General business confidence has improved, with most responses received in the two weeks following the Reserve Bank announcing it was reducing the official cash rate,'' the institute said. ``Many expect more interest-rate cuts to come.''

Government's Deficit

Yesterday, New Zealand's government said its budget deficit will be almost twice as large as earlier forecast as the slumping economy cuts tax revenue from consumers and businesses.

Capacity utilization, a measure of factory usage, decreased to 90.8 percent in the third quarter from 92.4 percent in the previous three months, today's report showed.

``This is a time of unprecedented challenge for the global economy,'' Finance Minister Michael Cullen said yesterday. ``The effects of the turmoil on the economy, peoples' level of confidence and security has been profound.''

The government yesterday slashed its forecast for annual economic growth to 0.1 percent for the year ending March 31, 2009, down from its May prediction of a 1.5 percent expansion.

The economy grew 3.2 percent in the year through March 2008.

To contact the reporter on this story: Victoria Batchelor in Wellington at vbatchelor@bloomberg.net.