Business Outlook

April 2010

Firming Up

Confidence abounds within the National Bank Business Outlook survey. A net 50 percent of respondents expect better times over the year ahead. This takes confidence back to levels seen in February. When we look at the sectoral mix, there is a pretty consistent picture: firms’ assessment towards the general economy is extremely perky. Even the agriculture sector has recorded an improvement in business confidence in the month despite the drought, though the level continues to lag those of the other sectors.

We continue to pay close attention to firms’ own activity expectations – a key lead barometer that tracks economic growth. Perkiness towards the general economy is spilling over into firms’ assessment towards their own business, with a net 43 percent of respondents expecting better times ahead. This is the highest level for the own activity reading since May 1999 and reverses the lull seen in March.

Importantly, the improvement is pretty well across all sectors. Despite still low levels of building consent issuance and the likelihood of private commercial construction activity slowing, the construction sector recorded not only the largest monthly increase in their own activity outlook, but also has the highest level.

The positive expectations towards their own businesses look to be spilling over into other survey indicators.

• Profit expectations are up 7 percentage points to a net 26 percent expecting higher profits over the year ahead – a level not seen since May 1999.
• A net 13 percent expect to be hiring staff over the year ahead – a jump of four points on last month. This is the highest reading since February 2005.
• A net 10 percent of businesses expect to be investing more. This is up only marginally on the month prior but the trend has been improving for a year.
• Export intentions have risen to its highest level since September 2007. A net 35 percent expect stronger export volumes over the year ahead, an improvement of 10 percentage points.

Our composite growth indicator from the survey continues to strengthen. It is now signalling year-on-year growth of 5 percent over the coming year.

If there is an element of caution that must accompany stronger economic prospects, it is the outlook for inflation. The latest CPI data point to inflation remaining contained. But inflation expectations rose marginally and pricing intentions in our survey continue to nudge up. A net 26 percent expect to be increasing prices over the year ahead. This is up only marginally on March and is not at a level that brings inflation tremors. Yet the trend remains up, particularly in the service sector which tends to be a sticky type of inflation dynamic. Based on the service sector pricing intentions reading, non-tradable ex-housing inflation look set to rise from the current 2.2 percent level towards close to 4 percent by the end of the year.

For the first time since March 2001, more respondents expect the unemployment rate to fall than rise. With this also comes stronger expectation that interest rates will rise, with a net 72 percent expecting higher interest rates over the year ahead. That firms’ assessment towards their own business and their wider outlook continues to improve despite expectations of higher interest rates is comforting.

Slowly but surely the economic recovery is firming - or what seems to be accelerating. The survey is flagging the potential for a typical strong pro-cyclical upswing in momentum, with the possibility of 4 to 5 percent growth in the year ahead. At this stage, investment intentions are lagging the pick-up in firms’ own activity expectations. But there is no doubting the improving trend. We take particular heart from the rising trajectory for profits. Now we know 2009 was a poor year on the profits front (the amount of company tax paid was down 12 percent on 2008, after adjusting for changes to the company tax rate) so the uplift is somewhat of a bungy cord dynamic at play. But if expectations reading is maintained and matched by reality, then increased hiring and investment will naturally follow. In fact we already seem to be seeing this occuring across some listed companies. If it continues and small-to-medium sized enterprises follow, then the "statistical" recovery that started in mid 2009 will have some real legs.

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.