Business Outlook

July 2009

Light at the end of the tunnel?

Business confidence took another big jump higher in the month, recording its highest reading since March 2002. A net 19 percent of respondents expect general business conditions to improve over the next 12 months, up 13 percentage points from the previous month. Confidence improved across all sectors, with manufacturers posting the largest increase. Surprisingly, confidence in the agriculture sector also improved, though the level remains entrenched in negative territory and rural folk remain the most pessimistic compared to other sectors.

Firms’ own activity expectations also recorded a lift, with a net 13 percent of respondents expecting improvements in their own businesses in the coming 12 months, compared to a net 8 percent in June. The sectoral breakdown is mixed, with the services sector recording the biggest increase, with retailing and construction also up while the manufacturing and agriculture sectors showed declines. Unfortunately this mix is not what we would refer to as pointing to a sustainable and quality recovery.

One interesting observation from this month’s survey is the fact that the level of business confidence has exceeded that of firms’ activity expectations. This is something that has not occurred for over a decade, with the last time being May 1999. No doubt with increasing signs of stabilisation emerging around the globe, and increasing talk of an end to the global recession by year’s end, confidence in the future has perked up, even if some are not exactly seeing it in their own business. Improved confidence is an important step towards recovery, and we appear to be making that first step. But of course the feel good factor is not sufficient in itself and at some stage the substance check will be provided by what firms see in their own business.

Looking at the other key indicators, investment, employment and profit expectations all showed improvements as well. However, they all remain in negative territory. Pressure on the bottom line remains, with a net 14 percent of firms expecting lower profits in the year ahead. Investment intentions improved from -6 to -2. The labour market situation does not look to be turning around anytime soon, with a net 7 percent of firms still looking to shed staff. However, this is an improvement from the previous month’s -17 reading, suggesting the pace of job cuts is easing. A net 74 percent of respondents expect the unemployment rate to continue rising.

Our composite growth indicator – which comprises own activity, profit, employment and investment expectations – continues to improve and is flagging the possibility that the economy will stop contracting soon. And though it is not suggesting that growth is set to accelerate away anytime soon, it does make a welcome change from worrying about how deep we might fall.

Looking through the other results of the survey, export intentions rose to a net 14 percent expecting an increase over the year ahead, an indication that external demand might be starting to improve. A net 13 percent of respondents expect to increase prices, up 4 percentage points. However, this is not going to make the Reserve Bank Governor lose any sleep, for the level is still consistent with annual inflation remaining at the bottom of the 1 to 3 percent target band.

Looking at our new survey question relating to the ease of getting credit, there was a slight improvement from the previous month, though a net 15 percent of respondents still expect credit to be more difficult to obtain over the coming year. There was a noticeable deterioration amongst retailers, where a net 29 percent expect access to credit to be more difficult, up from a net 4 percent last month. The agriculture sector was another expecting access to credit to get more difficult.

Overall, this month’s survey suggests that the light at the end of the recession tunnel may be just around the corner. We are still cautious about the outlook, for we have not really seen the full impact of rising unemployment and reduced rural incomes yet. And the stubbornly elevated New Zealand dollar is obviously not doing our exporters much good. But we have to respect what our respondents are telling us. More people (migration) and that feel good factor are powerful dynamics. The outlook is improving, and so it should after six quarters of contraction. Challenges remain, not least the need for the economy to rebalance. Still, going through the rebalancing process against the backdrop of positive growth is more bearable than in an environment of contracting activity.

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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