Business Outlook

December 2008

The Grinch

Thank goodness it’s Christmas. Another month, and another set of pretty grim readings from our Business Confidence survey.

First of all, some good news. Headline business confidence managed to record an improvement in December. A net 35 percent of respondents expect general business conditions to deteriorate over the coming year. That’s eight percentage points better than what we saw in November.

Now for the bad news, which is pretty well the rest of the survey. The Grinch looks set to steal Christmas. Firms’ own activity expectations have collapsed — again. A net 22 percent of firms expect worse times for their own business over the year ahead. This has surpassed the previous record low seen in April 1988. Activity expectations in retailing fell a staggering 21 percentage points. A net 49 percent of retailers expect worse times ahead for their own business. That’s not just a record low, its 19 points below the previous nadir — recorded in March 1991! At present there seems a huge disconnect between what consumer confidence surveys are telling us, and what retailers are, or expect to see through the tills. Activity expectations across services, construction and agriculture were down (the latter only marginally) while manufacturing showed a slight improvement.

Last month’s record lows in employment intentions, profit expectations and investment intentions have been bettered, and by that we mean they are worse. A net 22 percent expect fewer staff over the year ahead, 43 percent lower profits and a net 13 percent to invest less. Retailing and construction stand out across all sectors, despite policymakers taking aggressive action, including cutting interest rates, aimed at stabilising domestic demand. Ouch. Our composite growth indicator for 2009 from the survey can be summed up in one word: awful.

Assertions (and accusations) are often made that weak confidence is commentator driven. This argument is clever by two-fold. Business confidence actually recorded a small improvement this month, while it is firms’ expectations towards their own business that continue to slide. The latter has been, and will no doubt continue to be, the key barometer to watch. Amongst all the hurly burly of aggressive interest rate cuts, lower petrol prices, weaker currency, and change of government, it’s pretty clear what is dominating: the global scene; and vulnerable position the economy was in prior to recent events. Facing the deepest and most synchronised global recession since 1982, New Zealand is not immune.

We are now seeing the consequences as we move beyond the financial crisis itself and into the real economic downturn across our major trading partners. Unlike previous downturns, no one is immune. Tourism numbers are falling and the same can be said for commodity prices. Exporters love a lower currency, but typically not the reasons behind the falls. Export intentions bucked the overall trend across the rest of the survey and managed a mild fillip, although the overall level (+9 percent) remains weak.

Most commentators are in the process of downgrading their growth estimates for the coming year. Anything in the black would be a positive surprise. But it is the composition to growth that is equally important as we weigh up countervailing forces. The first is the requirement that growth and resources reallocate from the spending side of the economy to the earnings sector over time. A lopsided picture to growth is reflected in a prodigious current account deficit. It’s all about rebalancing, that is, spending less and saving/earning more. At the same time we have a poor global environment, which is putting paid to the hope that a rejuvenated export sector will become the economy’s saviour.

In the meantime, we remain critically dependent upon fiscal policy. Some are looking for the combination of tax cuts, lower mortgage rates and cheaper petrol prices to entice the consumer to spend our way out of the jam. Now that would be truly ironic given that it was over-exuberant consumption that got us into this position in the first place.

If there is a bright spot to put on this month’s survey, it is that inflation is rapidly becoming yesterday’s story. Inflation expectations have fallen from 3.7 percent to 3.2. Pricing intentions have tumbled. A net 14 percent expect to raise prices over the year ahead, down from a net 23 percent last month. When demand is weak, buyers have to be enticed.

In the current discounting environment, I’ve been doing my bit to support the retailers. My daughter is getting a trampoline for Christmas (amongst other things). Christmas Eve is all about assembly. Ours has got all the fittings including a safety net. The great thing about trampolines is that they are spring-loaded. The further and harder you push down, the bigger the bounce. And that’s a likely story for 2010.

To all our readers and respondents: have a safe and merry Christmas.

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. material.