Business confidence has gone from strength to strength according to National Bank's July survey.

Over the year ahead 51 per cent of firms now expect their own activity to increase while only 7 per cent expect a decline. The net 44 per cent positive reading is up five points from June.

Other indicators also made gains.

A net 24 per cent expect better profits, up four points from June, a net 18 per cent expect to invest more, up three points, and a net 19 per cent expect to take on additional staff, up nine points.


The headline measure reflecting expectations of the general business situation, already high, firmed one point to a net 48 per cent expecting improvement.

The bank's chief economist, Cameron Bagrie, said the results were tremendously encouraging considering the background of global uncertainty, softening commodity prices (albeit from highs), firming expectations that interest rates will be moving up and a rising currency.

But the survey would not have captured the political gridlock in Washington over US fiscal policy, and it would reflect only the first leg of the kiwi dollar's recent climb, he said.

The bank's composite indicator drawn from the survey suggested economic growth of 4 per cent or better over the year ahead was easily within reach. But with more solidity to the growth outlook an official cash rate of 2.5 per cent was on borrowed time, Bagrie said. The Reserve Bank reviews the OCR today.

"They are going in September. They now need a reason to stop rather than a reason to go. You can see candidates for making them stop, but those are risk factors, as opposed to certainties."

An emergency setting for the OCR was no longer required.

"The Reserve Bank can't take rates too far. We are not talking about tightening policy. But they are too low compared with where they need to be.

"Sometimes when you have a job to do, you're better to just get it done. Brace for interest rates to move up. Call it taking the official cash rate from being extraordinarily low to just exceptionally low."


Relative to its global peers New Zealand's economic story looked remarkable, Bagrie said.

"The danger in such instances is that financial markets front-run the story so far, via a higher currency and higher interest rates, that one nucleus of support, namely loose financial conditions, disappears before the party has moved beyond 9pm."

Relative to their long-run averages every sector is upbeat. The construction sector is the most positive overall.

"Some of that is the base effect - they have had such a torrid time that the only way is up. But construction is the bellwether."

On hiring intentions the strongest increase was among manufacturers with a net 24 per cent expecting to increase staff numbers, up from a net 6 per cent last month.

Construction and services also posted double-digit increases in hiring intentions.

A net 29 per cent of businesses expect to raise prices.

That was not overly high, nor in itself a catalyst for higher interest rates, Bagrie said.

"Though with a net 50 per cent of businesses in the construction sector expecting to lift prices, the Reserve Bank's June assumption of subdued construction cost inflation looks like wishful thinking."

Goldman Sachs economist Philip Borkin said the messages for the latest survey were remarkably similar to what the same survey was suggesting between March and May last year.

"Yet the pace of economic recovery over the second half of 2010 disappointed," Borkin said. "So what has changed to say that the economy will match expectations this time around? We do believe balance sheet improvement has progressed further and more positive anecdotes are now emerging from the rural sectors," he said.

"Our central view is for economic activity to build momentum over the second half of this year. But at the same time, we are cautious of the downside risks still present, particularly around an unwarranted tightening in financial conditions."