Business Outlook

June 2009

The umbrella

Confidence continues to rise. A net 6 percent of our respondents expect general business conditions to improve over the next 12 months, up 4 percentage points on May. Leading the charge is the construction industry with a net 46 percent expecting better times ahead, the highest reading since 1999. Conversely, sentiment within the agriculture sector slipped and it’s hard to go past the reality check that a dairy payout forecast of $4.55 / kg milk solids will be having.

Firms’ own activity expectations continued to nudge higher as well. A net 8 percent expect better times ahead. Improving sentiment was apparent in all the major sub-groups, bar services.

These movements are welcome. The firms’ own activity expectations reading, by itself, is now pointing to positive growth. But, like last month, the dog still has fleas. Profit, employment and investment intentions remain stuck in groundhog day, barely budging on the month prior. A net 24 percent of firms expect lower profits. Profit expectations was up in retailing and manufacturing, but down in agriculture, construction and the service industries. Employment intentions fell marginally. The labour market outlook remains particularly poor with a net 17 percent expecting to hire fewer staff in the year ahead, down 1 percentage point on May. A net 6 percent of firms expect to be investing less, again down marginally from the previous month. Recovery will not become self-fulfilling until investment and hiring pick up. These are naturally lagged responses, but critical nonetheless.

Our composite growth indicator – which comprises own activity, profit, employment and investment expectations – remains negative. The economy continues to contract. But like last month, the positive spin is that the pace of contraction is occurring at a slower rate.

Across the remainder of the survey, export intentions picked up, but with only a net 11 percent expecting exports to increase over the year ahead, the index remains low. Pricing intentions continue to fall. A net 9 percent expect to raise prices over the year ahead, down 3 percentage points on the month prior. There is simply no pricing power left in the economy and we may well see inflation fall below the bottom of the 1 to 3 percent target band.

This month we introduced a new question, relating to the ease of finding credit. This is in recognition of the critical role the process of credit creation and facilitation play within the economy. The past decade has seen a growing portion of literature devoted to the “credit channel of monetary policy”. The operation of this channel over the past year has been a key reason why central banks have used the traditional monetary policy lever more aggressively. Internationally there are a host of surveys that report on the availability of credit, and these – such as the US Federal Reserve Senior Loan Officer Survey – are closely watched.

A net 17 percent expect credit to be more difficult to get over the coming year. Those engaged in the construction industry perceive access to credit as improving over the year ahead (+5 percent), while the service sector perceives access to credit as “tight” (-24 percent).

This is difficult to benchmark, as is normally the case when you first start building a time series. However, surveys such as the Fed’s Senior Loan Officer Survey generally report the availability of credit being restrictive, around a net minus 40 to 60 percent (depending on which sub component). Obviously, this comes from the supply side of credit, whereas we are assessing perceptions from the demand side. But it is nonetheless interesting to view the relativities, which remain stark.

These divergences highlight a key difference between the likes of the United States and New Zealand. The former is stuck in a systemic downturn. As house prices fall, spending stops. Profits decline. Jobs are lost as cost cutting starts. Mortgages can’t be paid. We see forced house sales. House prices fall... ...jobs are lost, credit quality deteriorates, banks start making losses, credit is tightened, house prices fall, and the spiral is in motion. The outlook for asset prices and the underlying strength of the financial system are key elements.

Obviously, economic conditions have altered the rules and terms on which credit is offered. It would be folly to think that, six quarters into a recession, things in New Zealand would remain the same. Yet, if there is one insinuation we could possibly take from our survey, it is that while credit conditions have tightened, the credit pendulum has not swung too far. The umbrella provided when days were sunny and life buoyant, has not been completely withdrawn now that it has started to rain.

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.