By Brian Fallow
WELLINGTON - Business confidence declined for the third month in a row in the National Bank's survey, though it remains in the optimistic range last seen during the 1992-95 recovery.
A net 46 per cent of respondents expect the business environment to improve in the next 12 months, down
from 53 per cent in April and a peak of 68 per cent in February.
The retreat in confidence had National Bank chief economist Brendan O'Donovan scratching his head.
He said it came at a time when the international outlook had improved, domestic indicators like retail sales, tourism and the property market were good, inflation was absent and interest rates were low and stable.
The exchange rate rose about 5 per cent during April, but it is hard to lay all of the latest fall in confidence at that door.
For one thing, export expectations have held up.
And the decline in confidence is across all sectors, including service and construction firms, which are relatively insulated from the exchange rate.
The survey was completed by May 10 and since then the dollar has fallen about 3c against the US dollar.
"The Reserve Bank effectively punctured the currency balloon in mid-May," Mr O'Donovan said.
It had rightly pointed out that New Zealand commodity prices were recovering only slowly, export performance was patchy, the balance of payments deficit was set to move above 7 per cent of GDP and there was no short-term prospect of a tightening in monetary policy.
Firms' expectations of their own prospects, including profitability, investment and hiring intentions, all declined but not dramatically.
Pricing intentions remained almost unchanged, with only a net 12 per cent of respondents expecting to raise prices.
Mr O'Donovan said the Reserve Bank made an important assumption in its latest forecasts that one-off price rises in electricity, rates and petrol would not flow through to other firms' pricing and wage-setting behaviour.
"If they are right, short-term interest rates will tend to stay around current levels for a while yet."
