Business Outlook

December 2009

Christmas Cheer

Business confidence softened further in December – the third successive monthly decline. A net 39 percent expect better times ahead, down 4 percentage points on November’s reading. Confidence was down across all the major sub-groups.

Despite the slight fall in confidence, the glass remains half full. The overall level of confidence remains robust, and noticeably so across all the major segments. Confidence is still strongest in the construction industry, but is now closely followed by retailing, services and manufacturing.

The general spirit of the remainder of the survey is one of improvement.

• Firms’ own activity expectations nudged up a further 3 percentage points. A net 37 percent expect better times for their own business over the year ahead. Significantly, this improvement was underpinned by improved perceptions across services, manufacturing and agriculture while the domestic juggernauts of construction and retailing eased a tad.
• A net 16 percent of businesses expect higher profits over the year ahead – the highest reading since early 2002.
• Employment intentions nudged higher. A net 6 percent expect to be hiring staff over the year ahead. To be fair the movement is marginal, but the trend is still up.
• A net 10 percent expect to be investing more over the year ahead, up 3 percentage points on last month, and the highest reading since late 2007.
• Export intentions remain resilient in the face of the NZ dollar. A net 26 percent expect to be exporting more over the year ahead, which is back to pre-Lehman levels.

The sectoral picture across each measure is somewhat mixed. But generally speaking the construction sector showed an easing trend while others picked up the baton. Construction has gone from being top of the pops for activity, profits, employment and investment to rank 2nd, 4th, 3rd and 1st respectively. The North Island showed an improving trend and is now most optimistic when it comes to own activity, profits and investment. Conversely, perception across all these indicators eased in the South Island, although the south remains more optimistic regarding hiring staff.

When we roll such readings from the survey into our composite growth indicator, the economy could well be on track for 3 to 4 percent growth. Let the good times roll.

With economic improvement there is the inevitable pressure on prices. While inflation expectations eased a tad, pricing intentions nudged higher. A net 18 percent expect to be pushing up prices over the coming year. This is still low but the trend has been rising for three months. Significantly this month we have seen pricing intentions across the service industry rise to a 13-month high. Intent does not necessarily match reality (although the correlation is pretty good) but this is the sticky sort of inflation that can prove to be persistent. Nonetheless, it remains early days to be making overly sweeping statements in such regards and we’ll take our lead from multiple months’ readings as opposed to one.

An improving trend in the soft data such as confidence surveys has now been apparent for nine months. Based on the historical correlation with growth, the scene is set for a respectable upswing across the economy. Yet, uncertainty remains as to how much of the improvement emanates from base effects or the feel-good factor from simply emerging from recession. When you are down, everything looks up. What is clear is that proven evidence in the so-called hard data is required over the coming months. Intent must be matched by reality. For firms to commit to hiring and investing, they need to see a sustained pick-up in demand. A sustained pick-up in demand requires hiring and investment to ensure the recovery is on a solid footing. And so for the coming months we are back to watching the chicken and the egg.

Some believe this conundrum will be resolved in the coming three months. If indeed it is, the argument follows that interest rates will be moving up in early 2010. Certainly most respondents (sixty nine percent) concur that rates will move up over the coming year. But after an eighteen month period of sub-trend growth you’d think it would require more than three months of improvement before you had too many concerns about the party beginning to rock too much, thereby necessitating taking away the punchbowl.

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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