Business investment was expected to contract sharply in the
near-term, according to a special Treasury report released
yesterday.
In its December update, Treasury forecast business investment
to decline by 15% in the year to March 2010 and by 24% in the
down-side scenario.
In keeping with recent predictions, Treasury has now updated
its forecast.
The Government's accounts for the seven months ended January
are due for release on Friday.
"Business investment was weaker than we expected in the
September quarter 2008, and we now expect it to follow a path
similar to the down-side scenario," Treasury said.
Investment was an important driver of both short-term GDP
fluctuations and the economy's long-run growth potential.
Treasury said the main determinants of business investment
were current and expected demand for a firm's products.
The latest quarterly survey of business opinion showed that
business confidence and firms' activity in the December 2008
quarter, and their expectations for the March 2009 quarter,
were all at their lowest levels, in seasonally-adjusted
terms, since at least 1970.
The weak outlook for activity, combined with limited ability
to pass on large input cost increases because of the weak
demand, led to expectation of profitability falling to its
lowest level in 26 years.
As a result, intentions to invest in plant and machinery fell
to their lowest levels since 1975.
Treasury said the cost and availability of finance were also
relevant to investment decisions.
Recent falls in interest rates had made it cheaper for New
Zealand businesses to borrow, but the reduced availability of
credit and tighter lending criteria might restrict credit
growth.
"Lower interest rates may encourage some firms to invest.
For others, they are unlikely to outweigh the weak demand
they face."
A name, residential address, and (preferably residential) telephone number is required from readers who comment on ODT Online. These details will not be visible to site visitors.