Business confidence in surprisingly good health

By NZPA

Thursday 10th October 2002

A surprisingly optimistic survey of business confidence today caught market observers on the backfoot.

Analysts had been expecting confidence to slide lower in the Institute of Economic Research's (NZIER) September quarter survey.

And in actual terms, there was a slight deterioration -- a net 5 percent of firms expected conditions to worsen over the next six months, compared with a net 2 percent in the June quarter.

But in seasonally-adjusted terms, a net 18 percent of firms reported a positive outlook compared to a net 8 percent previously -- suggesting the economy was growing strongly and could push economic growth as high as 6 percent for the December quarter.

"This is good and supported by a net 9 percent saying they plan investing in machinery (which is above the average of 6 percent) and a net 11 percent planning to hire more people -- well above the average," BNZ economist Tony Alexander said.

NZIER senior economist Doug Steel said the domestic economy was still being driven by the tailwinds of high export returns and a low currency.

"The market to date has really underestimated how much money that is actually in the economy from that source and how much it's really kicking along domestic activity," he said.

Based on the results, the survey is predicting continued strong growth through the rest of 2002, with the world slowdown kicking in locally in 2003.

ANZ Bank treasury economist Sean Comber said the extent of the rise was very considerable and unexpected.

"It's reassuring to see that once you take account of seasonal variation and the fact people tend to get a little more gloomy about the outlook during the winter months... there is actually a reasonably strong rebound in overall business confidence."

BNZ treasury economist Craig Ebert noted the survey did not directly include agriculture which will be a drag of growth in the future.

While the positive results meant interest rates were unlikely to be cut in the near future, the poor world economic outlook meant they were unlikely to rise for some time either.

Those expecting a sharp near-term GDP slowdown might also have to reassess their views, said Mr Ebert.

Third and fourth quarter growth forecasts would probably be revised upwards, with the institute suggesting growth to around 5 percent for the year to December, and 6 percent for the December quarter year on year.

Firms' expectations of their own activity were strong, with a net 27 percent expecting their activity to increase (30 percent seasonally adjusted).

However, Mr Steel said the Indian summer could not be expected to last, thanks to the prospect of an Iraqi war, higher oil prices and a decline in commodity prices.

A mild slowdown was also predicted for Australia where business confidence had already fallen sharply.

But Mr Steel said it was possible New Zealand firms would plug on with their investment and employment plans for some time.

A net 2 percent of firms increased staff over the September quarter in actual terms, and a net 11 percent of firms intended to hire more staff over the next three months -- the highest since June 1995.

A net 9 percent of firms also planned to approve new investment in the next year.

Indeed, the tightness of the labour market was now clearly acting as a constraint on firms' ability to increase output. Although demand and orders continued to be the biggest cited threat to expansion, more firms cited labour as their biggest impediment than at any time since June 1975.

The institute said these constraints "call into question the feasibility of the rate of economic expansion" currently being flagged.

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