Business sentiment troughing, but recession won't lift till year-end

Tuesday 7th July 2009

Business sentiment is rebounding from its deepest troughs in the last 40 years, but leading indicators suggest the recession will drag on into the third quarter of 2009, according to the New Zealand Institute of Economic Research's Quarterly Survey of Business Opinion, released this morning.

Expectations for trading conditions in the next six months have improved markedly, with a net 25% now expecting the next six months to be difficult, from a net 65% of firms recording a pessimistic outlook three months ago.

"Some of these numbers remain as bad as they've ever been," said the NZIER's chief executive, Pierre de Raad. "I wouldn't get excited that there's a new dawn here."

A net 36% of firms reported deterioration in their own activity over the three months to June 30, a key indicator for at least one more quarter in recession. But there was a marked reduction in pessimism for the outlook to September.

A net 10% of respondents were negative about their own trading outlook, compared with a net 36% negative when asked the same forward-looking question three months ago.

Employment and investment intentions remain very weak, with a net 19% of firms say they intend to cut staff over the next three months, down from a net 36% who expected to cull in March. Some 60% of firms expect to maintain existing staff numbers in the September quarter.

Capacity utilisation showed signs of revival in the June QSBO, rising from 86% - the lowest capacity use recorded since June 1992 - to 91%, the largest increase in this indicator in the series' history, with the largest rebound recorded in the construction sector, despite indications of even weaker trading in the June quarter than the first three months of the year.

Construction sector intentions turned positive in June, but materials suppliers remain in difficulty, with 67% reporting lower output in the quarter just past.

Profitability expectations remain poor, with a net 24% forecasting lower profitability in the next three months, albeit a sharp improvement on the net 44% negativity.

De Raad said strength in exports to Australia and China were important contributors to higher capacity use, although domestic manufacturers were also withdrawing some capacity.

This suggests that firm "have made adjustments to lower activity by trimming staff numbers and capital inputs. They are running leaner operations" and are likely to want to raise prices once capacity use expands again, although pricing intentions are stable for now".

While still very weak at a net 23% negative, intentions to invest in plant and machinery showed a strong improvement compared to almost half of all firms expecting to invest less back in March, its lowest point since the series began in 1975.

Australian manufacturers showed a strong improvement in sentiment, from 61% net negative in March for the three months ahead, to just 4% negative in June. New Zealand manufacturers were net 22% negative in the June survet, having also been at negative 61% in March.

Despite widespread reporting that tight credit conditions are harming output, firms themselves reported this as a far less significant factor than weak demand.

Businesswire.co.nz

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