Business Outlook

November 2009

Still Perky

Business confidence ebbed lower in November. A net 43 percent expect better times ahead, down 5 percentage points on October’s reading. Across the five major sub-groups we survey, only retailers recorded an increase in confidence. The construction sector had the largest drop in confidence, down 14 points, but this was coming off strong gains in the previous month. Despite the turn lower, it is hard to describe the level of confidence as anything other than healthy – with confidence being maintained at levels last seen in 1999!

An improving trend is still apparent in the key sub-components across the survey. Firms’ perception towards their own business improved 3 percentage points. A net 34 percent expect better times for their own firm over the year ahead. A net five percent of firms expect to be hiring staff over the coming year. Slowly but surely the labour market looks to be turning, although a net 35 percent still expect the unemployment rate to be higher over the year ahead. Nonetheless, this still represents a 2-year low. A net 7 percent of firms plan to increase investment, up marginally on the month prior. Going against the grain was a slight fall in profit expectations, although with a net 11 percent still expecting improved profits over the year ahead it’s encouraging in terms of driving the next legs of the cycle, namely investment and jobs.

Growth readings from the survey continue to point towards firming momentum over the coming year. Firms’ own activity expectations is flagging 4 percent growth while our composite growth indicator is pointing to a lower, but still respectable, upswing of 3 percent. The improvement is even more marked when we consider that a net 73 percent of respondents expect interest rates to move up over the year ahead. With pricing intentions remaining subdued (a net 15 percent expect to raise prices), time still looks to be on the RBNZ’s side. There are likewise few signs of the strong currency having adverse consequences with export intentions rising to a one-year high.

The construction sector remains top of the pops, ranking first for confidence, own activity expectations, employment, profits and investment. Perception towards residential investment remains at the forefront of construction’s optimism (a net 45 percent expecting better times ahead) while the month has also seen a significant easing in confidence towards the commercial sphere.

2009 has hardly been an inspiring year, but momentum is building. Across the global economy, there is no doubt that challenges remain. This is not your typical credit downturn and recovery story. The typical credit event has centred on the business sector. While aspects of this are apparent in this cycle, this time around it is household balance sheets in need of repair. And when faced with rising unemployment, this looks set to be a protracted process. Hence, policymakers and economists continue to talk in guarded tones about the U, bathtub or saucer shaped recoveries.

Probably the most difficult task ahead of us at present is trying to “predict” the behavioural aspect within the economic cycle. Economic trends are about combinations of economics, finance and human behaviour. The difficulty in the current instance is that you have an economy undergoing deep structural change as we adjust to a new normal. Human nature however, wants to go back and grasp the “old”, as in the way things were pre-crisis. The problem is that the period in the lead-up to the global financial crisis was abnormal. With change comes a process of learning.

One scribe notes the process of learning as similar to watching a teenager learn from a mistake: faced with two choices, the path chosen is likely to be the one that is most fun and least painful. And so it applies to the general economy in terms of how we “learn”. Across the corporate world we see leaders recognising that a step-change is required if NZ’s medium-term positive potential is to be unlocked. We have huge strategic advantages as a nation. But that requires a sacrifice up front in terms of earnings, and we all know how conditioned the market, and hence behaviour, can become to hitting those near-term benchmarks. The existing level of government services is unsustainable given the income (tax) base. But where is the hurry to forge ahead with the hard decisions when you are judged in the court of public opinion?

As Christmas nears, we all look forward to good cheer. Here is hoping it does not bring complacency when it comes to the inevitable process of change.

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.