Business Outlook

August 2010

A trot to a walk

After recovering in the first half of 2010, the economic patient is showing signs of regressing. Business confidence continues to ebb lower. A net 16 percent of respondents still expect general business conditions to improve in 12 month’s time, but this is down 12 points on the month prior. The good news is that confidence is still in positive territory. The bad news is that confidence is down 34 points from the peak reached in February and an easing trend has been apparent for four months.

We’ve referred to the last few months as seeing momentum wane from a gallop to a canter to a trot. The risk is building that we take a further step down to a mere walk.

Firms’ own activity expectations also continue to soften, albeit from healthy levels. A net 26 percent of businesses expect better times for their own business over the year ahead, down 6 points from last month. This takes firms’ activity expectations to broadly “average” levels, which a glass-half full description would describe as still respectable. But a glass half-empty view would take it as somewhat disconcerting to see firms’ own activity expectations recede (or level out) so early in the recovery process. We say early in the recovery process because while the economy is into its second year of expansion, we have only recovered three quarters of the output loss during the recession - and that is assuming a robust 0.7 percent expansion in the third quarter!

All surveyed measures softened in the month. Profit expectations were down 5 points. A net 4 percent expect to be making more money over the year ahead, compared to a long-run average of 7. A net 4 percent expect to be hiring staff over the year ahead, below its long-run average of 6, and down 4 points on the month prior. A net 3 percent of firms expect to be investing more in the coming year, down 2 points from last month and compared to a long-run average of plus 12. Investment intentions are now negative for two of the five major subgroups (agriculture and construction) and flat for services.

When we roll the collated movements into our composite growth indicator, it is flagging year-on-year growth of around 3 percent by early next year. Respectable, but hardly stellar going by the standards of past recovery periods following recessions.

Export intentions bucked the easing trend. A net 31 percent of businesses expect to be exporting more over the year ahead. This is encouraging on two levels. First, improved export performance is critical in giving some spine and backbone to growth. No longer can NZ.Inc rely on the “borrow and spend” dynamic of old, under the veil of better income generation in the future. Today’s consumption must be increasingly determined by today’s income. We appear on the right track. Second, despite global wobbles, exporters continue to plough ahead, a dynamic that no doubt reflects the increasing diversification of our export base. Two decades ago, almost 35 percent of our merchandise exports went to the United States and Europe. Now, Asia and Australia take nearly two-thirds (63 percent), and their performance is a far cry from Yanky doodle / Europe et al, whom no longer looks so dandy and hit an all-time low, taking only 21 percent of our merchandise exports.

Pricing intentions barely budged in the month. A net 32 percent of businesses expect to be raising prices over the year ahead. Firming pricing intentions in retailing and manufacturing were offset by anticipated declines in construction and the service industry. At current levels, pricing intentions are consistent with 4 percent inflation, a relatively demure picture considering the anticipated boost to inflation courtesy of GST and other one-offs in the second half of 2010.

Amongst the hurly-burly of economic developments, there are a host of possible cadavers and so-called fundamentals or scumdamentals that are driving confidence. Businesses have a right to feel cautious. We have the reality to contend with, which is that you don’t get out of a financial crisis in 18 months. There is the temptation for pessimism to sink in when equity market sentiment is weak. However, equity markets’ correlation with lead indicators looks somewhat of a blind leading the blind exercise. At the other extreme we still have semblances of optimism: a lot are simply getting on with business.

Right now we have an economy that appears to be settling into a moderate expansion phase, albeit with clear risks. There’s growth all right, but it doesn’t feel like it for a lot of folks. Such is the base-effect reality of recovering from lows. On top of that we have an economy embarking in deep-rooted structural change that involves massive portfolio and resource reallocation as the economy shifts from being spending centric to one of being more earnings (i.e. export) driven. Resources (labour and capital) take time to mobilise. The term “this time is different” insofar as describing recoveries is typically a grave-yard for economists. But things have shifted and are certainly pointed that way at present.

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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