Business Outlook

July 2010

Canter to a trot

Business confidence fell for the third consecutive month in July. A net 28 percent of respondents still expect general business conditions to improve in 12 month’s time, down 12 points on the month prior. The fall in business confidence was broad-based, but were led by the manufacturing and agriculture sectors, which both posted declines of 14 points. A “glass half-full” view is that the level of confidence, both at the aggregate and at the individual sectoral level, is still well above the historical average. A “glass half-empty” take on things is that the level of business confidence has almost halved since its recent peak in February this year, and that the rate of decline (the so called second derivative) is increasing. We characterised last month’s decline in confidence as the economy merely shifting from a gallop to a canter. Perhaps this month is seeing a shift from a canter to a trot.

Firms’ own activity expectations held up better, though it did still fall 7 points to a net 32 percent expecting better activity over the year ahead. All sectors bar manufacturing recorded declines in the own activity reading. Granted, the increase of 1 point in manufacturers’ own activity assessment is margin-of-error stuff. But at least the level, with a net 42 percent expecting an improvement in their own business, suggests this sector is still faring quite well. The 1 point fall in export intentions also suggest that there has been no discernable impact from any wobbles in trading partner activity as yet, although we need to remember that China now takes 10 percent of NZ’s merchandise exports and the only discernible wobbles in that area are of the speed variety.

Sifting through the tea leaves, there was an almost universal decline in employment intentions, investment intentions and profit expectations across all sectors. A net 8 percent of respondents expect to hire staff in the year ahead, a fall of 5 points. This is still at a level which indicates positive jobs growth. However, at a sectoral level, the employment intentions readings have turned negative for retail and agriculture. Somewhat surprisingly, employment intentions for construction bucked the trend to post a 4 point increase in the month. Perhaps this is due to the industry losing workers to Australia, and having to recruit more employees, rather than a sign that things are expected to pick up.

Worryingly from a supply side perspective is the 5 point decline in investment intentions to +5, below the historical average. At this stage in the economic cycle, we would have expected a stronger rebound in private sector investment by now, particularly given the sharp contraction seen during the recession. The current investment intentions reading do not portend of a marked pick up in the near-term. Not helping the investment case is the fact that profit expectations have fallen 10 points to a net 9 percent expecting an improvement to the bottom line in a year’s time. The largest decline was in the agricultural sector, where a net 2 percent now expect a lower profitability this month, compared to a net 15 percent expecting an improvement last month. Perhaps farmers are already factoring in the possibility of downward revisions to the payout forecast after the recent fall in global dairy prices?

The movements in this month’s survey are beyond what could be put down to usual monthly volatility and the past three months has seen a clear change in direction. Our composite growth indicator is still pointing towards year-on-year growth in the 3 percent region by late this year, but this is down on the 4 percent plus it was flagging a few months back. Growth momentum is easing (or at least expectations towards it), but is far from being snuffed out.

If there is a silver lining in this month’s survey, it is the pullback in pricing intentions after last month’s surge. A net 31 percent of respondents expect to be putting prices up, down from a net 39 percent in June. The fall in pricing intentions was uniform across all sectors. With GST set to rise on 1 October, what is perhaps surprising is the fact that this reading is not even higher given that almost all firms selling to the final consumer will have to pay higher GST. Perhaps this is an indication of the tough demand environment firms are facing, and the reality that there will be a lot of consumer resistance to price rises, no matter what the cause. But we still expect the RBNZ to remain vigilant and guard against any spill-over into generalised wage and price setting behaviour from the coming spike higher in headline inflation. The fact that surveyed inflation expectations ticked up a little to 3.2 percent from 3.1 percent will not have gone unnoticed by the RBNZ.

Tomorrow’s OCR decision is set to see the RBNZ raise interest rates by another 25 basis points to 3 percent. The majority of respondents are already resigned to the fact that interest rates are heading higher, with a net 83 percent expecting rates to rise over the next 12 months compared to a net 78 percent in the previous month. But with signs that the economy is not surging away and momentum is levelling out, we find it difficult to envisage rates will move up every six weeks.

Survey Results

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

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