Business Outlook

August 2008

Signs of Life

Good news. Confidence is recovering. The economic patient is starting to show signs of life. A net 21 percent expect worse times over the year ahead, a welcome bounce from the net 43 percent expecting tougher times last month. The improvement is across the board — with retailers, manufacturers, agriculture, construction and the service sector feeling chirpier (or less downbeat). Optimists accounted for 25 percent of responses — the highest since May 2002, while pessimists represented 46 percent.

Other aspects of the survey portray a similar message. Firms’ own activity expectations have bounced back into the black. A net 5 percent expect better times over the year ahead. But it’s still low by historical standards, so we shouldn’t get overly excited. The level remains consistent with relatively anaemic economic growth. Yet it’s encouraging to see the streak of 5 successive negative reads finally broken. Growth is still growth, and an aura of stabilisation is certainly welcome.

Profit, employment and investment intentions remain in the red, but all have shown mild improvements. A net 16 percent expect lower profits over the year ahead, an improvement on a net 27 percent recorded last month. Investment intentions have improved from a minus 4 percent to minus 1. Residential and commercial investment intentions remain negative, but showed reasonable bounces off last month’s lows. Employment remains one of the relatively weaker aspects of the survey, with a net 8 percent expecting fewer staff. It’s been low and negative for seven successive months, but at least it’s an improvement from July’s read. Interestingly, retailing was one sector to report a fall in employment intentions. Turning to the earnings sector, export intentions have increased to the highest level we’ve seen since November 2007.

Our composite growth indicator is still giving us a negative read on momentum, despite a sense of mild optimism returning to firms’ own activity expectations. There are certainly still a hoard of factors to keep businesses wary about their prospects. These include: ongoing concerns regarding the global environment and particularly the United States economy, falling house prices, a number of investment moratoriums being put in place, and Chicken Little’s perennial fear.

Yet we still find the messages from the survey mildly encouraging. Slowly but surely a base is forming, from which the economy will recover from.

So in the current environment, why the lift in confidence? It’s possibly merely a simple case of bungy-nomics, and relief finding that the cord is attached.

Yet there are also wider macroeconomic forces at work. The Reserve Bank lowered the Official Cash Rate 25 basis points in late July. With a net 63 percent of respondents expecting lower interest rates down the track, expectations of more to come are obviously having a stabilising influence. The currency is oscillating and wobbling with global sentiment, but still down 3 percent on the month prior. This will benefit the economy, but will take time to have its impact. And we’ve seen oil prices recede, which would explain why pricing intentions have nudged lower. Amongst a lot of gloom, there are at least now some positives to smile about.

We cannot stress the importance of confidence enough. It’s not the key driver of wealth, but critical for maintaining momentum. Economics and business cycles are as much about human behaviour, the feel-good factor and risk appetites — as well as the laws of supply and demand.

During the good times: asset prices move up, spending rises, profits increase, employment rises, risk appetites improve as an aura of enthusiasm dominates, buyers emerge, asset prices move up, spending rises, profits increase, employment rises, risk appetites improve, asset prices… and the spiral is in motion.

Such spirals are heavily behavioural. It’s a game of confidence. Of course we can also see the reverse. Asset prices fall, spending shrinks, profits fall, the unemployment rate moves up, caution prevails, risk appetites wane, buyers are absent, asset prices fall, spending eases, profits drop further… and the downward spiral continues.

The risk with the latter spiral is that fear and caution become self-fulfilling. Signs of improving confidence is the first critical step in seeing the latter spiral broken.

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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