Businesses regain confidence

By BRIAN FALLOW eonomics editor

Business confidence has strengthened further in the National Bank's first survey of the new year.

Firms' views of the general business environment, and of their own activity outlook, have now recovered to the levels of this time last year - before the steep decline in confidence recorded in May.

Other indicators in the bank's survey are also positive.

Investment intentions are the highest for two years, hiring intentions have improved and expected export volumes are holding at levels prevailing over the past three years.

Even pricing intentions and inflation expectations, the dark side of the rebound in confidence over recent months, have improved.

Of the firms surveyed, 31 per cent expect to raise their prices over the next three months. While that is high, it is down from 44 per cent in the December survey. Inflation expectations are also down.

National Bank chief economist Brendan O'Donovan said gains in the dollar's value would help reduce cost pressures, and oil prices appeared to be past their peak.

The retail sales deflator, a measure of consumer price inflation, was high, but sales volumes were down compared with the September quarter, suggesting that retailers passing on higher costs risk losing business.

The overall confidence measures suggested firms were looking at the domestic economy, which was going nicely, rather than the increasingly menacing international outlook, Mr O'Donovan said.

"We are in an upswing and that does buy us some time, but the world [downturn] will impact in the second half of this year."

A convincing case could be made for either a rapid recovery in the United States, or a slower one where years of sub-par growth were needed to work out the imbalances - such as inflated asset values, low household savings and a deep current account deficit - which had built up over 10 years of economic expansion.

But the case for a prompt interest rate cut in New Zealand was based on what had already happened in the US, not on how long it would take to recover, Mr O'Donovan said.

He advocates a 25 basis-point cut by the Reserve Bank next month to maintain economic momentum.