Business Outlook

July 2008

CPR via the OCR

The economy needs oxygen. Business confidence has retreated. A net 43 percent expect worse times over the year ahead, down from a net 38 percent last month.

It is the trend in how firms feel about their own business that is most disconcerting. Firms’ own activity expectations have sunk deeper into the red. A net 8 percent expect conditions for their own business to worsen over the coming year. Not since 1988, and the start of the survey, have we seen five successive months where firms’ own activity expectations have been negative. While the rural heartland and confidence towards agriculture remain positive, it’s a sea of red ink across retailing, manufacturing, construction and services.

Employment intentions have slipped once again. A net 14 percent expect fewer employees over the year ahead. To be fair, it’s a small move, down 2 percentage points from last month, but there’s been a clear trend now since late 2007. Employment sentiment is uniformly negative across the five major sub-groups. Investment intentions slipped another percentage point this month with a net 4 percent expecting less investment over the next 12 months. Profit expectations, residential and commercial investment intentions are all down. The one note of optimism in the survey was a slight uptick in export intentions. Praise be a lower NZD/AUD.

Our composite growth indicator from the survey is not only negative, it is telling us the economy is firmly in contraction mode. Hopes that the dip in momentum over the first half of the year was merely of a technical nature and will be short-lived are far from reality. The economic patient is deteriorating as opposed to stabilising.

Looking at the detail of the survey, a couple of aspects have struck us of late. First, there is a clear divide between the North and South Islands, with conditions weaker in the upper north but relatively firmer in the deep south.

Indeed, breaking our composite indicator into the respective islands suggests the South still has forward momentum — just. Second, the service sector is now one of the relatively weaker pockets of the economy. It’s a sector that historically tends to be removed from cyclical peaks and troughs. Not this time around. Hence the slowdown we have seen in the economy is more than a cyclical phenomenon. The cycle itself and speed of the turn is now engulfing all and sundry. No one is immune.

Slowly but surely the economic patient will be nursed back to good health. Dr Bollard has delivered much needed interest rate relief, and promises more. It’s a brave — but welcome — move considering the realities of where inflation resides. Once again we have seen a further uptick in pricing intentions, with a net 43 percent expecting to raise their prices, and one year ahead inflation expectations have increased from 3.5 to 3.7 percent. However, there is also no doubting the realities as to where the economy sits. Pricing intentions will diverge from reality if people are not buying.

We see last week’s action by the Reserve Bank as more about ironing out the extreme, as opposed to turning the trend. Stabilisation as opposed to reflation. It was a question of cutting rates to stop borrowing rates from moving up, as the flow-on effect from repriced credit risk around the globe washes through. While we all love the antidote, you need to be sick in the first place for it to be delivered.

Relative price signals including deposit rates (which are encouraging saving as opposed to spending), a lower currency and a lower cost of capital relative to labour are fostering an inevitable rebalancing within the economy. We are in the process of moving momentum from the spending centric to the earnings side of the economy. As the going gets tough, businesses are increasingly re-examining their business model, cost structures, and looking at consolidation. It’s all about driving the key elixir of wealth and living standards, namely better productivity growth.

Illness takes time to heal, and the same goes for imbalances in the economy that need to be purged. The economic patient will be nursed back to good health. The patient just needs to understand and accept that sustained recuperation and rest on their own behalf are prerequisites.

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 on to
www.nationalbank.co.nz/economics/outlook/pdf/BOBackgroundPaper.pdf
This background paper also contains enrolment forms for new survey respondents.

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

Survey Results

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