Business sentiment in sharp rebound

Cameron Bagrie

Business sentiment has perked up this month - the National Bank's survey has recorded its biggest monthly gain since December 2000.

"It's still below the levels we saw during the Asian crisis," the bank's chief economist, Cameron Bagrie, said.

"But there's perhaps a hope that the worst is behind us."

The housing market has shown signs of recovery - in turnover if not prices - dairy prices have ticked back up, there has been another round of tax cuts and global sharemarkets have rallied amid talk of "green shoots".

A net 15 per cent of respondents expect business conditions to get worse in the year ahead, but that is a sharp improvement from a net 39 per cent who were pessimistic last month.

Their expectations of their own activity have jumped as well. A net 4 per cent still expect it to decline, but that compares with a net 21 per cent in March expecting the going to get harder over the year ahead.

A net 19 per cent of firms expect staff numbers to fall over the year ahead - an improvement from the profoundly negative reading of the two previous months but still a very low level of employment intentions by historical standards.

The state of the labour market was the big risk ahead, Bagrie said.

"It's hard to see the housing market finding a base, let alone staging a recovery, while the unemployment rate is moving up pretty rapidly."

Last year business and consumer confidence had diverged markedly, with business sentiment plunging while consumer confidence held up. The reverse might be about to happen, as the labour market cycle tends to lag the broader economy.

"Investment intentions have improved from last month's record low reading but a net 12 per cent of respondents still expect to invest less - something that does not bode well for the future productive capacity of the economy," Bagrie said.

Profit expectations improved 11 percentage points though a net 30 per cent still expect lower bottom-line earnings over the year ahead.

Overall these indicators paint a sombre picture of growth prospects, though not as sombre as in past months.

Bagrie said they were consistent with the economy shrinking 2 per cent rather than the 3 per cent indicated previously.

UBS economist Robin Clements said one bounce did not make a trend.

"We will need to see further gains if we are to conclude that a genuine turning point has been reached. Moreover, now we have an additional threat, in the form of the swine flu, that could undermine sentiment again."

Bagrie said that the first step towards recovery was for the economy to find a floor.

Business confidence surveys had proved to be telling indicators of economic momentum, he said.

But it would be naive to think the economy was "on the cusp of nirvana". Structural imbalances, like negative household savings rates and a large current account deficit, needed to be corrected and that would not be quick or easy.

"We are not going to see a sustained upswing until we have gone through that rebalancing process. I'll become a lot more cheerful when the current account deficit is small and the household savings rate is high. Then we will have the ingredients of a recovery that is strong and of good quality."