Business Outlook

May 2010

Feeling Great

Nothing seems to be denting the air of optimism towards prospects for the New Zealand economy. A net 48 percent of respondents in this month’s survey expect general business conditions to improve in 12 month’s time. This is down two points from the net 50 percent reading in April, but remains at very high levels historically. Looking at the sectoral picture, all sectors bar manufacturing recorded a fall in expectations over the general economy. In terms of the absolute level of confidence, the construction sector remains the most optimistic even though it showed the biggest drop in the month. The agriculture sector continues to have the lowest level of confidence.

When we look at businesses’ assessment of their own activity, they seem to go from strength to strength. A net 45 percent of respondents expect better times ahead for their own business in a year’s time, an increase of 2 points. This is the highest own activity reading since May 1999. The construction sector once again has the highest absolute level of own activity reading. But the biggest increase in the month was recorded in the retail sector, which rose 10 points. The agriculture sector recorded a 6 point drop in their own activity reading, no doubt impacted by drought conditions in certain parts of the country.

Turning to the other activity gauges, employment intentions rose 3 points to a net 16 percent now expecting to hire additional staff. This is the highest reading since April 2002, and is at a level which is consistent with around 4 percent employment growth. Unsurprisingly, a net 11 percent of respondents expect the unemployment rate to fall one year from now, up from a net 4 percent expecting a fall last month. Investment intentions rose 4 points to a net 14 percent expecting to invest more. This is now above the historical average level and suggests we are on track for positive business investment growth, though at a gradual pace rather than anything more substantial at this stage. Profit expectations was the only activity gauge to post a decline in the month, down 2 points to a net 24 percent. But it is still at a healthy level which, if translated into actual profits, should see firms act on their investment and hiring intentions.

Our composite growth indicator from the survey continues to point towards a strong recovery ahead. The composite indicator is at a level which is consistent with over 5 percent year-on-year growth by the end of this year.

While the growth story is very much welcome news, the inflationary undertone from this month’s survey is not. Inflation expectations were unchanged at 2.7 percent, but will surely rise once respondents start to factor in the GST increase announced at the Budget. Pricing intentions rose to a net 28 percent now expecting to push prices higher. This is a level which is consistent with around 3 percent annual headline inflation, and this is before accounting for GST changes. Adding to the inflation story is a further increase in capacity utilisation, a sign that the recovery is starting to use up spare resources in the economy at perhaps a quicker rate than we would have expected.

If we were to base monetary policy decisions solely on this month’s National Bank Business Outlook, then a rate rise next week is a done deal. In fact, a net 79 percent of respondents expect interest rates to head higher in a year’s time.

The past month has seen the New Zealand dollar tumble, increasing unease towards the sovereign debt crisis in Europe, a selloff in global equities, mixed economic messages and an economy friendly Budget. Much of these developments were too late in the month to be captured by the survey. Beyond that, firms simply seem to be focusing on what they can control and getting on with business. We take encouragement from this. But with so much going on after the close off date for this month’s survey (14 May), next month’s survey reading promises to provide some real insights into businesses’ thinking about the array of contrasting forces at play.

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.