Business Outlook

May 2009

The parachute

Good news — optimists outnumber pessimists. A net 2 percent expect general business conditions to improve over the next 12 months. Confidence was up across all segments.

Importantly, firms’ expectations of their own activity clawed back into positive territory. A net 4 percent of firms expect better times ahead, up from -4 percent last month. The construction sector is now the most optimistic, while retailing is the only sector expecting reduced activity.

Most other indicators in the survey also turned marginally for the better. Profit, investment and employment all ticked up. But the dog still has fleas. All remain firmly negative, and below Asian crisis levels. The outlook for profits remains weak, with a net 24 percent expecting a deterioration over the year ahead. This is naturally putting the kibosh on hiring and investing. The labour market outlook is still particularly poor. A net 16 percent of firms expect to hire fewer staff, with hiring expectations now being negative since February 2008. The economy continues to contract, it is just that the rate of descent has slowed.

Exports bucked the general improving trend, slipping slightly in the month. A net 6 percent of firms expect to increase exports in the year ahead. Continued weak global demand and a rising currency (excluding the NZD/AUD) is not a pleasant mix.

Pricing intentions remain low. A tight trading environment has meant businesses have limited ability to raise prices. Pricing intentions across the service sector in particular have changed massively over the past five months and point to low ‘core’ inflation ahead.

On the face of it, the winner in this month’s survey is construction, which has now become head cheer-leader when it comes to overall confidence and perceptions towards their own business. Yet this is too clever by half. Employment intentions in construction are the second lowest across the 5 sub-groups. Investment intentions took a step backward in the month, and a net 19 percent of construction related businesses expect prices to fall.

Last month we put the improvement in business confidence and other survey measures down to the bungy-cord dynamic. After such an extended period of decline it is only natural to expect a base to be forming across the economy or the pace of contraction to moderate. The same applies this month. Green shoots are emerging. Of course Pandas eat green shoots so we are far from out of the woods. There will remain tension between the change versus the outright level of activity.

We fully expect the economy to regain forward momentum in the second half of 2009 as this bungy-cord dynamic plays through. Of course this will be more technical than anything else, with the unemployment rate still tracking up. Just as early 2008 did not feel like a recession in a traditional sense, the recovery will likely remain patchy as we move along the bottom of the bath tub (before coming up the other side). Even on the assumption that we return to solid growth in 2010, it will not be until 2011 that the economy returns to late 2007 levels.

Nonetheless, the hope is that improvements in confidence can become self-fulfilling. Confidence surveys play an important role in both New Zealand and overseas (e.g. the US ISM, Eurozone PMI’s and Japanese Tankan survey are closely watched). New Zealand’s economic data is released with a long delay, so current and leading information on the economy is keenly sought.

Once confidence improves, a spiral of success can quickly take hold as improving perception encourages spending, profits, investment and jobs. Pent-up-demand typically unleashes upswings that are inversely proportional to downturns. It all starts by getting back that feel-good factor. At current levels of confidence, particularly in relation to jobs, investment and profits, we have a way to go. But May has seen New Zealand take another small step in the right direction.

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.