Confidence at 5-month high in bank survey

Photo / NZ Herald

Business confidence has improved to a five-month high in the National Bank's latest monthly survey.

But the bank's chief economist, Cameron Bagrie, said it remained to be seen whether firms would follow through with more investing and hiring.

Forty-four per cent of chief executives surveyed this month expect the general business outlook to improve over the year ahead and 11 per cent expect it to get worse.

The net 33 per cent optimistic is up from 24 per cent last month and the highest level since June.

Firms' views of their own outlook have also improved with a net 35 per cent expecting better times over the year ahead (up 4 points). This is also reflected in similar increases in hiring and investment intentions.

Profit expectations strengthened, a net 15 per cent of firms expecting a better bottom line in the year ahead, up from 9 per cent last month.

The levels of hiring and investment intentions are a far cry from flagging an economy that is off to the races, Bagrie said.

They merely take sentiment back to where it was mid-year. But that also means it is at levels better than at almost any time in the past three years.

"A key problem the economy faces at present is not confidence, which is actually not bad, but the preparedness to act on it," Bagrie said.

Businesses wanted to see four or five months of stability and improving demand before they took the plunge.

"We seem to get two or three and then all bets are off."

In addition to domestic factors like a lower lamb kill, the misfortunes of the kiwifruit industry and a cruel flip in climatic conditions from too wet to too dry, risks to the global economy were intensifying, he said.

While the United States appeared to be stabilising, Europe still faced enormous challenges and east Asian economies (apart from China) slowed sharply in the September quarter.

China was taking a more proactive stance on inflation - though that only meant growth slowing from a gallop to a canter - and Australia was slowing as well in response to interest rate rises this year.

Domestic demand in New Zealand, meanwhile, remained very weak, Bagrie said. Discounting by retailers appears to be widespread and while export commodity prices are good farmers are preferring to reduce debt rather than put their chequebooks in their pockets and go to town.

Bagrie said the weakness of retailing and the housing market were part of what would be a lengthy process of rebalancing as growth shifted from the spending to the earning side of the economy.

"Today's large annual trade surplus is a sign of the adjustment under way, but there is a long journey ahead."

In light of that, and with the business confidence survey recording a drop in firms' pricing intentions despite the recent hike in GST, Bagrie now expects the Reserve Bank to be able to keep the official cash rate on hold at 3 per cent until the second quarter of next year.

"We wouldn't rule out a March move and neither will the Reserve Bank in its December monetary policy statement [next week]."

But on the other hand the market implications of the huge amount of funding governments around the world would need to raise next year could arguably have the bank on hold for more of 2011, he said.

The most upbeat sector in the survey is services, leading expectations for activity, employment and investment, and second for profitability.

Bagrie said services was a bellwether of economic momentum.