Business confidence remains "healthy" in November, flags 3%-4% growth, National Bank says (Update 1)

Business confidence remained at "healthy" levels in November, despite dropping slightly over the month, and is indicating economic growth of between 3% and 4% over the coming year, the latest National Bank Business Outlook survey found. (Update 1 includes economist comments.) A net 43% of respondents to the survey said they expect better times ahead over the next year, down 5% from October. However confidence was "still perky" and remained at levels last seen in 1999, National Bank economist Khoon Goh said. The latest survey shows firms still expect unemployment to rise over the year ahead, as with interest rates. However, firms' pricing intentions remained "subdued", meaning "time still looks to be on the RBNZ's (Reserve Bank of New Zealand's) side," Goh said, referring to the RBNZ's comments that it expects to keep the Official Cash Rate at its record low of 2.5% until 'the second half of 2010'. However, despite the 'perkiness' of the survey, Goh still cited the need for policy makers to make some hard decisions regarding economic behaviour, saying "here is hoping (Christmas) does not bring complacency when it comes to the inevitable process of change". A net 73% of respondents said they expected interest rates to rise in the coming year, while a net 15% said they expected to raise prices. "There are likewise few signs of the strong currency having adverse consequences with export intentions rising to a one-year high," Goh said.

An improving trend is still apparent in the key sub-components across the survey. Firms' perception towards their own business improved 3 percentage points. A net 34 percent expect better times for their own firm over the year ahead. A net five percent of firms expect to be hiring staff over the coming year. Slowly but surely the labour market looks to be turning, although a net 35 percent still expect the unemployment rate to be higher over the year ahead. Nonetheless, this still represents a 2-year low. A net 7 percent of firms plan to increase investment, up marginally on the month prior. Going against the grain was a slight fall in profit expectations, although with a net 11 percent still expecting improved profits over the year ahead it's encouraging in terms of driving the next legs of the cycle, namely investment and jobs. Growth readings from the survey continue to point towards firming momentum over the coming year. Firms' own activity expectations is flagging 4 percent growth while our composite growth indicator is pointing to a lower, but still respectable, upswing of 3 percent.

The construction sector is focusing its expectations on residential investment, with a net 45% expecting better times ahead from net 41% in October. Confidence for commercial construction activity fell over the month, with net 11% expecting better times ahead, well down from net 47% last month.

The construction sector remains top of the pops, ranking first for confidence, own activity expectations, employment, profits and investment. Perception towards residential investment remains at the forefront of construction's optimism (a net 45 percent expecting better times ahead) while the month has also seen a significant easing in confidence towards the commercial sphere.

Goh noted how the economy was undergoing a deep structural change as it adjusts to "a new normal", requiring a "sacrifice up front in terms of earnings". A shot was also fired across policy makers' bow, with Goh asking: "where is the hurry to forge ahead with the hard decisions when you are judged in the court of public opinion?"

Across the corporate world we see leaders recognising that a step-change is required if NZ's medium-term positive potential is to be unlocked. We have huge strategic advantages as a nation. But that requires a sacrifice up front in terms of earnings, and we all know how conditioned the market, and hence behaviour, can become to hitting those near-term benchmarks. The existing level of government services is unsustainable given the income (tax) base. But where is the hurry to forge ahead with the hard decisions when you are judged in the court of public opinion? As Christmas nears, we all look forward to good cheer. Here is hoping it does not bring complacency when it comes to the inevitable process of change.