Business shrugs off September 11 and spends up

By Rob Hosking

Friday 5th April 2002

A surge in businesses investment is under way, with companies spending heavily, suggesting the post-September 11 downturn is over.

The latest gross domestic product figures show investment fixed assets rose 8.5% in the December quarter. Most of this was in plant and machinery, which rose by nearly a quarter.

That release coincided with National Bank business confidence survey figures, which showed a rise in investment intentions. Increases in GDP growth have generally followed a rise in businesses' own investment intentions throughout the past decade.

Those two indicators together appear to foreshadow a year of solid, if unspectacular, growth, Bank of New Zealand economist Craig Ebert said.

"If anything is a good verification of what firms are actually doing, as opposed to what they say they are doing, it's that business investment figure," he said.

The good economic news led Finance Minister Michael Cullen to crow this week that "from where we stand there are no significant black clouds on the horizon, other than the kind that our farmers and hydroelectric power companies pray for."

The sunny economic weather meant New Zealand had a "breathing space" in which to continue diversifying the economy, he said.

That view from the government, which is increasingly in election-year mode, was met with warnings from some economists.

"There is a real danger of complacency when we actually need a sense of urgency," WestpacTrust chief economist Adrian Orr said.

The current indicators are favourable, he said - with the only concern being the fall in the dairy price - but they were largely the result of a cyclical upturn.

"When you look at the growth New Zealand has achieved you'd have to conclude it's despite ourselves, rather than anything we've done. We've had kind weather, a low exchange rate and one-off increases in key commodity prices - and with all that we've barely got 3% growth. We've had a good resurgence in export revenues but that is now falling off."

The domestic economy was now expected to pick up the growth that was supplied for the past two years by the export sector, ANZ chief economist David Drage said. "We're on track for moderate growth but there's nothing spectacular in front of us.

"The downside risk to that is the external sector. One of the reasons the New Zealand economy remained robust last year was favourable supply factors in key markets for major commodity exports. Just as we lagged in feeling the impact of a weak world economy, many of our commodity markets will lag in feeling the recovery.

So, for the time being, many exports will face extremely difficult conditions, particularly dairy."

Recent rises in the dollar - if they are sustainable - are also likely to make life difficult, at least in the short term.

While the currency has yet to breach the 45USc mark, most economists believe the shift is not just a temporary fillip.

The New Zealand currency has risen several times against the US dollar over the past two years, only to slide back again. This week, though, economists were prepared to - tentatively - suggest that this time the move was more long term.

Partly this is seen as being off the back of the rising Australian dollar. That rise is driven partly by a better outlook for the world economy and more specifically by higher prices for base metals.

And both Australia and New Zealand are seen as having higher interest rates than Japan, Europe and the US, ASB chief economist Anthony Byatt said.

"That interest rate advantage has, however, been there for some time. The fact that dairy prices are heading down but our currency is rising suggests to me that a lot of it is influenced by the Australian dollar."

A further factor is the less uncertain global economy. In the wake of September 11 attacks, investors plumped for certainty, which meant US Treasury bonds. Investors are now looking for a better return elsewhere.

"Some of the rise has been from speculative flows - basically hot money," Mr Drage said. "We've had several fluctuations like this over the past 18 months but none have broken through that long-term downward trend we've had since 1996."

There could be a difference this time though, he said. Investors were currently more interested in taking advantage of interest rate differentials than they had for some time, and the relatively high New Zealand and Australian rates made this part of the world attractive.

There was considerable interest in New Zealand as an investment destination, Mr Orr said.

"As the US calms down there is increased interest in areas that produce better returns. That includes debt and government bonds and there's plenty of tyre-kicking going on in New Zealand equities. Hopefully any investment won't come in too big a rush."

Most economists think the New Zealand dollar is likely to be worth about 50USc by the end of the year.

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