Business Outlook

March 2010

Shopping for a revival

An optimistic tone continues to permeate through The National Bank Business Outlook Survey. A net 43 percent of respondents expect better times over the year ahead. This is down on February’s reading of plus 50 but still represents a healthy level of optimism across the economy. All, bar retailing, slipped in the month, reversing last month’s trend where retailing dipped, and confidence across the remaining sectors increased.

We continue to pay close attention to firms’ own activity expectations — the key lead barometer that tracks economic growth. This too was down slightly in the month. A net 39 percent of respondents expect better times for their own business over the year ahead. This continues to represent a high level of confidence in terms of what matters for this economy, namely what’s actually happening at the business level as opposed to the general climate, with the latter easily influenced by various anomalies from month to month.

The remainder of the survey is by-and-large a mixed bag. Employment intentions were unchanged at a net 9 percent expecting to be hiring over the year ahead. Profit expectations slipped 3 points, though a net 19 percent still expect better profits over the year ahead. Export intentions fell 6 points, to a net 25 percent expecting higher export volumes. Residential and commercial construction intentions eased. Pricing intentions were unchanged on the month prior, as was inflation expectations. Investment intentions went against the grain, rising a point. But all are movements well within what we would consider to be normal monthly volatility.

When we slice and dice the survey, a couple of themes are noteworthy.

• Confidence towards retailing has recovered ground after falling sharply in February. Retailing showed a notable lift in headline confidence (+8 points), own activity expectations (+5), profits (+3), employment (+6) and investment (+17). But the general trend across all other segments (agriculture, manufacturing, construction and services) in terms of the various components was down.
• The South Island generally showed larger declines across firms’ own activity expectations, employment and profitability and is now looking weaker compared to its northern counterpart.

Our composite growth indicator from the survey continues to flag the potential for a typical pro-cyclical pick-up in momentum and the possibility of 4 percent annual growth over the year ahead. Gauges such as employment and investment intentions are lagging the pickup in firms’ own activity expectations — more than what we have seen historically and suggests a more muted recovery. But abstracting from near-term noise, the trend has been one of general improvement for a year. Whether this month’s lull represents exactly that or something more persuasive remains to be seen. But at present the change has been insufficient in magnitude between months to suggest to us that the robust level story is no longer intact.

A significant challenge the economy faces is prospects for business investment. The steady recovery we have seen in investment intentions, from a trough of a net 19 percent expecting to cut investment a year ago to a net 9 percent expecting to increase investment in this month’s survey, is welcome. But it is one of the few survey indicators that remain below its historical mean (of 13), so clearly an element of caution remains.

An upturn in business investment is required for two reasons.

First, it is a concrete sign that the recovery process is broadening and has legs. As a business you don’t put cash to work until you have reached a certain “tipping point” in terms of perceived sustainability of the recovery. Swings in annual business investment of plus or minus 20 percent are not uncommon with a strong accelerator dynamic influential. The mid 1990’s cycle is a clear example of how sharply business investment can increase, particularly following an extended period of underinvestment. We are moving that way, but are not quite there yet.

Second, investment is a critical component of building capacity, or expanding the anaerobic threshold the economy can operate at without running out of puff. A failure to invest in capacity for tomorrow will result in a drag on future productivity trends and the supplyside capacity of the economy.

For now, the economy appears to be slowly moving towards building such capacity. It is critical that this trend extends and policymakers implement policy conducive to this occurring.

Survey Results

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

If you would like to become a respondent to our survey, send an email to economics@nbnz.co.nz with your business location and industry sector. For details on the nature and performance of the Business Outlook please refer to this file:
www.nationalbank.co.nz/economics/outlook/pdf/BOBackgroundPaper.pdf.
This background paper also contains enrolment forms for new survey respondents.

This material is provided as a complimentary service of The National Bank of New Zealand, part of ANZ National Bank Limited ("Bank"). It is prepared based on information and sources the Bank believes to be reliable. Its content is for information only, is subject to change and is not a substitute for commercial judgement or professional advice, which should be sought prior to acting in reliance on it. To the extent permitted by law the Bank disclaims liability or responsibility to any person for any direct or indirect loss or damage that may result from any act or omission by any person in relation to the material.