Business Outlook

April 2009

Green shoots?

Business confidence showed a marked improvement in April. A net 15 percent of respondents now expect a deterioration in business conditions over the year ahead, a significant improvement on the net 39 percent in March. This turnaround is the largest monthly improvement since December 2000.

Could this be the first steps of a recovery taking hold — the much talked about green shoots? We would dearly like to believe that it is. After all, the economy has been in recession since early 2008, and we are possibly in the midst of the sixth straight quarterly contraction in economic activity — the longest negative streak since the 1970s.

Indeed, respondents’ own activity expectations have showed a large lift as well, from March’s net 21 percent expecting worse times over the year ahead to just a net 4 percent expecting a deterioration this month. The own activity reading may still be in negative territory, but the second derivative has shown the largest improvement since February 1993.

Other key gauges in our survey also showed an improvement. To be sure, gauges such as employment, profit and investment intentions are still well entrenched in negative territory, but the first step to recovery is making a positive movement at the outset. Profit expectations improved 11 points, although a net 30 percent of respondents still expect lower bottom lines over the year ahead. A net 19 percent expect to reduce their workforce, a 9 point improvement from the previous month. While this is a welcome jump, such negativity towards employment prospects will remain a key spanner in the works towards both a recovery taking hold and the potential magnitude of it.

While investment intentions have improved from last month’s record low reading, a net 12 percent of respondents still expect to invest less — something which does not bode well for the future productive capacity of the economy. Investment intentions among manufacturers improved only marginally, to be the second lowest on record at minus 23. But a glimmer of hope for manufacturers could be found in the 30 point improvement in their export intentions, a record turnaround and back into positive territory.

Incorporating the key gauges into our composite growth indicator still paints a downbeat picture on growth prospects, though not as downbeat as in past months¹. Still, our composite indicator is pointing to a -2 percent annual growth rate, but at least this is a marked improvement on the prior months’ -3 percent readings. A turning point is at hand, but it’s about smaller rates of decline as opposed to something positive. Nonetheless, it’s clearly an encouraging and positive step.

Pricing intentions rose to a net 18 percent of respondents expecting to raise prices, and inflation expectations also increased a touch. But they hardly set off inflationary alarm bells, as current levels are consistent with inflation staying comfortably within the target band. A positive slant on this is that dis-inflationary concerns can be put to rest.

So what do we make of it all? After such an extended period of decline it’s only natural to expect a base to be forming across the economy. After all, policymakers have been working hard to achieve such stabilisation since mid 2008 and natural population growth and improving migration provide a natural base effect to growth. We see a bungy-cord dynamic taking hold, given the magnitude of declines in certain areas of the economy. While financial conditions tightened over the period the survey was conducted (courtesy of a higher currency and rising fixed mortgage rates), such forces have been swatted aside. Whether this can be put down to apathy remains to be seen. But the past month has seen slight bursts of sunshine. The housing market (volumes anyway) has shown signs of recovery, dairy prices have ticked back up, we’ve received tax cuts, domestic and international equities are off their lows, and a poor global economy makes New Zealand look a relatively attractive proposition both to those immigrating, and those considering departing. Clearly this is translating into firming optimism (or less pessimism) towards the economy.

Collectively, it would be naïve to believe the economy is on the cusp of economic nirvana. There are structural imbalances that have yet to be purged. Green shoots are fragile and, if not tended to properly, can quickly wilt. Yet we would be equally ignorant to disregard the messages coming from respondents themselves. Time and time again business confidence surveys have proved to be telling indicators of economic momentum.

The first step towards recovery is finding a floor. If this indeed gains momentum over the coming months, then attention will turn towards the quality and magnitude of any pending recovery. Across the alphabet of cycles we are bombarded with the ‘V’, ‘U’, ‘W’ and ‘L’. Where we are headed will be a combination of what businesses are telling us, and how far and fast the economy is progressing through the structural rebalancing process. We’ll be waiting patiently for next month’s story.

¹ Our composite growth indicator uses the forward looking activity indicators from the survey (own activity, investment intentions, employment intentions and profit expectations), combining them into a single index.

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.

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