Tracking the Trends

Friday 2nd February 2001

Next six months, net per cent

New Zealand businesses optimistic

Business confidence performed the economic equivalent of a u-turn in the December quarter according to NZIER's Quarterly Survey of Business Opinion. A net 31% of firms surveyed expect the general business situation to improve over the next six months. This compares with a net 45% of firms who were expecting a deterioration in the September quarter survey.

The turnaround in confidence was widespread, with all the major sectors surveyed (wholesalers/retailers, manufacturers, builders and service sector firms) optimistic about activity in the next three months.

... unlike Australian counterparts

Unlike business opinion surveys conducted in New Zealand, surveys carried out in Australia have consistently reported a downturn in business confidence. National Australia Bank's business confidence index, which shows firms' perceptions of the business situation over the next 12 months, fell in the December 2000 quarter to minus 4 (in the past the index has fluctuated between 30 and minus 25). This was close to the value reported in the June 2000 quarter, which was a nine-year low.

Another business confidence survey, conducted by the Australian Chamber of Commerce and Industry (ACCI) and Westpac Banking Corporation, which surveys manufacturing firms, also reported a deterioration in business confidence in the December quarter. A comparison with New Zealand manufacturers is shown in the chart below.

Why is there a divergence in business sentiment?

The following factors are likely to be contributing to the lower business confidence in Australia:

A post-Olympics slowdown has adversely affected some sectors of the Australian economy. This slowing in activity has been particularly strong in the construction and retailing sector.
The introduction of GST in Australia from July 1, 2000, has had a negative effect on confidence in some sectors.
Construction activity is not only reflecting a post-Olympic slowdown, but also showing some general weakness. This construction downturn is also coinciding with a period of weak household demand, which may be partly due to relatively high interest rates in the early part of 2000.
The outlook for manufacturing output in Australia is negative, with new orders and output growth slowing to levels last seen during the Asian crisis.

In comparison, New Zealand manufacturers are expecting increased growth in new orders and output in the next three months.

Despite these differences between the two countries, there are some results for manufacturers that are common to the two countries:

Firms in both New Zealand and Australia are facing higher import costs due to a low exchange rate.
Firms on both sides of the Tasman are experiencing a squeeze on profits. Costs have been increasing faster than prices, resulting in a squeeze on margins.
Exports have shown strong growth in both countries, reflecting the currency depreciations that have occurred.

Will NZ businesses stay confident?

A number of factors will support business activity over the next three months. Strong export growth is expected to continue, and domestic demand is expected to improve. Even the building sector - the weakest of the major sectors - expects output to remain stable.

But some dangers are looming. Slowing growth in the US may dampen export demand and an appreciating dollar will lower export returns. In view of this, demand may not recover as strongly as businesses expect. If this happens, business confidence might yet take another u-turn.

- Compiled by Lisa Yee

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