Business confidence jumped in May according to the latest National Bank Business Outlook Survey. A net 2% of respondents to the survey said they expected general business conditions to improve in the next year, compared to net 15% expecting them to get worse last month.

Firms' outlook for their own activity improved, with a net 4% saying they expected better times ahead, compared to 4% expecting their own business conditions to worsen last month. This was the best survey result since midway through 2008.

However, a number of indicators still remained negative despite improving slightly, or as National Bank Chief economist Cameron Bagrie said, "the dog still has fleas."

Firms' investment intentions for the next year 'improved' from a net 12% saying they would invest less last month to a net 5% in May saying they expected to invest less over the next 12 months. The outlook for profits remained weak, Bagrie said, with a net 24% of firms saying they expected profits to fall over the year (from net 30%). The labour market is set to keep hearing the negative news, with net 16% of firms saying they expected to hire fewer staff, compared to net 19% in April.

"Last month we put the improvement in business confidence and other survey measures down to the bungy-cord dynamic. After such an extended period of decline it is only natural to expect a base to be forming across the economy or the pace of contraction to moderate," Bagrie said.

"The same applies this month. Green shoots are emerging. Of course Pandas eat green shoots so we are far from out of the woods. There will remain tension between the change versus the outright level of activity," he said.

"We fully expect the economy to regain forward momentum in the second half of2009 as this bungy-cord dynamic plays through. Of course this will be more technical than anything else, with the unemployment rate still tracking up. Just as early 2008 did not feel like a recession in a traditional sense, the recovery will likely remain patchy as we move along the bottom of the bath tub (before coming up the other side). Even on the assumption that we return to solid growth in 2010, it will not be until 2011 that the economy returns to late 2007 levels."