Business Outlook

August 2009

Springtime

There seems to be no holding the economy back. Confidence surged again in August. A net 34 percent of respondents expect better times over the next 12 months, up 16 percentage points on July. The construction industry remains at the forefront of renewed optimism with a net 64 percent expecting better times ahead, levels last seen in the early 1990s.

Why the continued jump in confidence? There are a host of candidates ranging from rejuvenated confidence towards the housing market and spill over perception into the wider economy, improving global prospects, recovering equities and even the honeymoon period that the Government seems to have settled into. On top of that, we would include relief. After 18 months of recession, surely things can only get better! If we can navigate through the largest financial crisis in 80 years, with the unemployment rate rising to 6 percent and house prices only falling 10 percent, then bring it on! Damn the doomsayers, grab your wallet, we’re going shopping.

Virtually all survey indictors improved in the month. Firms’ own activity expectations are at close to a five-year high. A net 26 percent expect better times ahead and the jump is across all major segments including retailing, manufacturing, agriculture, construction and services. Profit expectations are back in the black, although only marginally so. Employment expectations are correspondingly less negative. Job losses continue but at a marginal rate of decline. This is still a far cry from the rate required to soak up new entrants into the workforce that natural population growth and migration brings, but at least it is moving in the right direction. Investment intentions have turned marginally positive. Export intentions have risen to a 10-month high. The only indicator to turn down in the month was commercial construction intentions, which fell back to zero. But this is more than compensated for by surging perception towards residential investment, with a net 48 percent expecting better times ahead – the highest reading since 1994!

Firms’ own activity expectations – a key lead indicator – is flagging 3 percent growth. Our composite growth indicator from the survey is more sedate on the recovery, but still well in positive territory.

Momentum, once unleashed, is a powerful dynamic and the economic cycle is as much about getting a feel for behaviour, as it is about the economic fundamentals. And there is no doubting a better feel-good factor is developing, despite the unemployment rate moving up sharply. With each passing day it seems more money is being lured out after taking refuge on the sidelines. Positive perception towards the property market, is at the forefront. Improving migration trends and a perceived housing shortage are influential. But a lot of the renewed exuberance seems to be premised on a quick return to “normal” conditions, which in turn is being interpreted as the way things were in 2006/07, prior to the financial crisis.

There is a huge amount of tension within the economic system. At one extreme we need to respect the nuances from confidence surveys. Time and time again they have proven to be an important bell-wether for the economy. Every economic cycle contains a strong behavioural aspect that is arguably more important than the laws of economics. Confidence matters. Pent-up demand can quickly be unleashed as confidence picks up. Economists and policymakers are notoriously bad at recognising such dynamics and hence tend to underestimate downturns and upturns. The latter seems to be unfolding at present.

At the other extreme there are clear challenges. A host of key structural gauges, such as the current account deficit and household savings rates, are telling NZ.Inc to save for tomorrow, as opposed to spend for today. But of course we need some spending to be moving forward. However, a durable upturn needs to be an earnings-driven recovery, as opposed to one that is housing led. The currency is hobbling that, although the downstream implications are not overly visible across the survey.

While we should be cheerful that the property market is responding to policy stimulus and helping the economy emerge from recession, we should not be surprised that it is keen to push on. However, a “mini-boom” in the housing market risks exacerbating existing problems if it is, in the words of RBNZ Governor Bollard, followed by a return to our old “borrow and spend habits”. If we move down that path it has a response from policymakers written all over it, and not necessarily of the OCR variety. The alternative is letting NZ borrow and spend its way out of a debt-fuelled consumption jam, then face an inevitable “adjustment”. Standing idly by and watching another binge unfold just doesn’t pass the smell test.

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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