Business Outlook

October 2009

Banding together

Business confidence has taken a breather after a meteoric rise. A net 48 percent expect better times ahead, down at the margin on September. The construction sector continues to set the bar in terms of poise, with a net 75 percent expecting better times ahead. Conversely, confidence eased across the service, retail and manufacturing industries. Despite the turn, the level remains robust and healthy.

Firms’ perception towards their own ground likewise dipped, but the movement is insignificant. A net 31 percent expect better times ahead for their own firms. It is hard to describe the readings as anything other than stabilising at elevated levels. Profit expectations continue to lift. A net 12 percent expect a better bottom line over the coming 12 months — the best reading in 5 years. This is encouraging in terms of driving the next leg of the economic cycle, namely investment and jobs. Investment intentions have risen 4 percentage points to +6. Conversely, employment intentions dipped 2 percentage points to zero. The movements are well within the normal volatility we would expect from month-to-month. Yet the movements portend of a lack of conviction when it comes to committing cold hard cash to areas such as employment and investment. Balance sheet consolidation and de-leveraging continue to dominate.

Growth readings from the survey are unchanged on the month prior. Firms’ own activity expectations are flagging 4 percent growth. Our composite growth indicator from the survey is gradually gaining momentum and pointing to 2½ percent growth.

The construction sector is at the forefront of the confidence readings. Construction ranks number one for business confidence (+75), own activity expectations (+58), employment (+20), profits (+27) and investment (+12). All the readings are up sharply on the month prior. Looking across the survey we are wary of drawing strong conclusions when we look at both the levels and changes in key variables.

Agriculture generally remains at the less optimistic end. The service industry showed the largest dip in firms’ own activity expectations and employment, and failed to follow the aggregate lift in investment and profits. Levels are not portending of anything telling (excluding employment). Until we see a few more months of data, we’ll reserve judgement on the sectoral mix. Suffice to say that growth in this month’s survey looks marginally narrower than in the months prior.

Across other survey indicators, export intentions improved a tad, indicating that recovering global demand is dominating the higher New Zealand dollar. Pricing intentions picked up in the month, but a net 14 percent reading is still indicative of a low overall level of inflation. A net 57 percent of businesses expect interest rates to rise over the coming year.

With momentum improving across the economy, it is inevitable that interest rates will rise from the extraordinary low levels they currently reside. To what degree and when this occurs remain subject to debate. A number of factors urge caution. Growth is coming from a low base. The New Zealand dollar is casting a dark shadow over prospects. The labour market remains weak. Yet, momentum is building, and if the survey is correct, it is coming from the area of the economy where inflation can quickly be generated. There is a worrying undercurrent of inflation pressure that permeated through in the September quarter CPI figures. Inflationary pressure from non-contestable pockets of the economy continues to dominate. More inflation from these pockets mean a greater growth sacrifice from contestable areas of the economy if aggregate inflation pressure is going to sit within the 1 to 3 percent policy band. House prices are picking up and if left unchecked, risk returning New Zealand to it’s borrow and spend habits of old and a widening current account deficit. If such imbalances extend, then the Reserve Bank will no doubt live up to the age old adage of taking away the punchbowl just as the party starts to rock.

It is at this juncture that monetary policy needs mates. The Reserve Bank has limited control over the currency, but there is no need to risk inflaming the meteoric rise seen to date. In the early stages of the cycle it is preferable for fiscal policy to take the lead in unwinding policy stimulus. The Minister of Finance has indeed flagged a sustained period of fiscal restraint so as not to burden the next generation with excessive debt. This will involve small tax changes (think ACC levies) and less spending (we pay if we want the service). The government balance sheet improves, but at the expense of the private sector’s. Unpopular for sure, but probably marginally less so than seeing interest rates knock the tradable sector into submission or unfairly burdening the next generation with debt.

Survey Results

The table can be viewed as charts on our Business Outlook charts page.

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