Business Outlook

February 2010

Up, up and away?

Business confidence has hit a decade high. A net 50 percent of respondents expect better times ahead, up 11 percentage points on December last year. This is the highest reading for business confidence since April 1999. Confidence was up across the manufacturing, agriculture, construction and service subgroups. Retailing bucked the trend with confidence falling 14 points.

Firms’ own activity expectations (the key lead barometer that tracks economic growth) followed headline confidence, with a net 42 percent of respondents expecting an improvement over the coming year – up from the net 37 percent in December. Confidence is strongest across the manufacturing, construction and service areas.

Profit and employment expectations have also started the year with a positive tone. A net 23 percent expect higher profits over the year ahead. A net 9 percent expect to be hiring over the coming year. Both compare well relative to their long-run averages and augur well for a broadening of the economic recovery. Export intentions continue to lift with a net
31 percent expecting better volumes over the year ahead.

When we roll such readings from the survey into our composite growth indicator, the economy could well be on track for 4 percent growth. So 2010 has started with good cheer.

Two aspects from this month’s survey went against the improving trend.

• Retailing confidence slipped. In fact retailing was the only sector to record a fall in confidence, firms’ own activity expectations, investment and employment. The latter two in particular are telling. A net 7 percent of retailers expect to cut employment and a net 6 percent to be investing less – a turnaround from positive readings at the end of 2009.
• Investment intentions eased. A net 8 percent expect to be investing more over the coming year but this is down 2 percentage points on the last reading. Such a decline is well within the margin of error, so we’ll hold judgment. However, the failure to follow the reads from employment, profits and activity expectations suggests there are deeper forces keeping firms in a holding pattern.

Pricing intentions nudged higher. A net 26 percent expect to be pushing up prices over the coming year. This is neither here-nor-there in terms of what it flags for the inflation outlook. And inflation expectations, while up slightly to 2.6 percent, had nonetheless been stable since mid 2009. But still, the trend in pricing intentions has been rising for five months and ultimately it is the direction that counts. Once again we see service sector pricing intentions on an upwards trajectory. This is a sticky sort of inflation that can prove to be persistent and tends to correlate well with underlying inflation. Intent does not necessarily match reality, but the direction is up and so too eventually will be the path for interest rates. A net 69 percent expect higher rates over the year ahead.

Collectively, we are once again left with an impression that all is well with economic prospects given readings from so-called “soft” economic data (of which confidence surveys are a part). Yes, we acknowledge that positive confidence readings are only natural when you emerge from recession with somewhat of an “it can’t possibly get any worse” attitude filtering through the responses. But we have been on an improving trend now for just under a year. Growth has followed. Admittedly it’s not strong, but growth is still growth. We also take considerable heart from the robustness of confidence in what has generally been a barrage of poor news over the past month. Since the start of the year we’ve had the start of a Greek tragedy, unemployment moving up sharply and the housing market hitting a wall. Positives have been apparent but generally are few and far between.

The coming months for the economy are going to be telling. Stepping back, we continue to see underlying improvement. Yet it would be folly not to be mindful of wider forces. There are still significant global forces at play. Amongst all the hurly-burly, changes to the tax system are also pending. While scant on details, there is clearly going to be behavioural responses in anticipation, with the housing market already suffering indigestion. Such dynamics are going to introduce a huge amount of “noise” into economic statistics as the economy adjusts to a new normal. At this juncture, it will be critical to focus on the big picture and not get caught up in the noise as we sift through the tea leaves.

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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