Business confidence highest in a decade, NZIER's QSBO survey finds (Update 2)

The New Zealand Institute of Economic Research's (NZIER) Quarterly Survey of Business Opinion (QSBO), which is closely watched by the Reserve Bank of New Zealand, has found business confidence jumped to its highest level in a decade in the September quarter. (Update 1adds comments from ASB economist Jane Turner saying it sees no RBNZ rate hike until mid 2010/Update 2 includes comments from ANZ economists seeing no RBNZ rate hike for an extended period) However, business confidence remains out of whack with recent experience and the NZIER said it is picking only a shallow and fragile recovery. Here is the full release below.

NZIER's October 2009 Quarterly Survey of Business Opinion provides strong evidence that the worst of the recession is over and that the economy is on the mend. However, until firms start to rebuild more assertively, the recovery will be gradual. Business confidence surged into positive territory in the September quarter (+27% from -14% on a seasonally adjusted basis), the highest level in a decade. Firms expect a significant acceleration in activity in the December quarter. However, there is still considerable disparity between expectations and reality. While firms are clearly more confident about the economic outlook, their recent performance has been weak and they remain cautious about hiring more staff or lifting investment. This suggests that a shallow recovery from the recession is likely. "However, we shouldn't get too carried away. Sales remain weak, and until firms see these picking up again, they are unlikely to take on many more staff or invest heavily. This suggests that the recovery from the recession will be shallow and gradual". But the recession has weighed on prices and profits"¦ The recession has generated excess spare capacity in the economy. The capacity utilisation of manufacturers and builders eased in the September quarter (88.4% from 90.7%). Declining activity and spare capacity in the economy has depressed prices, with a majority of firms reporting declining prices for three consecutive quarters. While prices have fallen, costs have not eased as dramatically, meaning margins and profits have been squeezed. Declining sales volumes have further weighed on firm profits. A net 39% of firms reported declining profits in the September quarter, but the outlook is improving with only a net 3% of firms expect declining profits in the December quarter. "¦so firms remain cautious about expanding too rapidly This weak profitability and as yet unconfirmed expectations of a strong recovery mean firms are approaching the recovery cautiously. A large majority of firms reported they reduced numbers of employees in the last three months. However, intentions for the December quarter are for no further job losses. Businesses remain wary of investing when profitability is under pressure. Intentions to invest in buildings and plant have continued to rebound but are still negative. "We are interpreting the QSBO results as firms being cautiously optimistic", said Shamubeel Eaqub, Principal Economist at NZIER. "Most indicators are headed in a positive direction, albeit from low levels in most cases. Firms can see the light at the end of the tunnel and are starting to think about the rebuilding and expansion of their operations, rather than focusing on further cutbacks".

Here is ASB economist Jane Turner's take on the QSBO results.

The NZIER quarterly survey confirmed that business confidence surged over the past few months. The turn-around was sharp, with the net balance of firms expecting own activity to improve increasing to 17%, from net 9% expecting activity to decline in the previous quarter. The improvement in confidence was widespread with the majority believing the recession is now over. However, the recovery was limited to forward-looking indicators, with firms continuing to report tough trading conditions in the September quarter. In particular, net 29% reduced staff levels (more than expected) and net 39% continued to see a decline in profitability. The economic recovery remains fragile and we remain cautious in translating the pick-up in confidence to a sharp recovery. The RBNZ are likely to find few surprises in the detail of today's report. With inflation pressures remaining very subdued, we do not expect the RBNZ will hike to OCR before June 2010.

Here is ANZ National's economists' views on the figures.

Today's QSBO is another piece of evidence suggesting the economy has turned a corner. Headline business confidence rose to a net 27 percent (seasonally adjusted) expecting better times ahead "“ the highest level in 10 years.  Firms' expectations of their own domestic trading activity also rose strongly, with a net 17 percent expecting improvement over the coming quarter, from a net 9 percent expecting a fall last quarter.   This is consistent with growth in Q4 of 1 percent.  These themes are very similar to those present in recent NBNZ Business Outlook surveys. The nuances from the survey need to be respected. Domestic trading activity has had an excellent relationship with actual GDP growth in the past.  Today's results suggest the economy is heading for 3 percent plus growth next year "“ a solid result.  The improvement in confidence was across all regions and sectors (albeit to varying degrees) suggesting that momentum is building.  As we have stated in the past, confidence is a very important component of an economy and can quickly unleash pent-up demand. Interestingly though, there is a large disconnect between what firms are experiencing and what they are expecting. The experienced domestic trading activity indicator remains mired in negative territory.  A net 20 percent of firms reported a fall in their own activity in the past three months (though we need to acknowledge that this was still an improvement on Q2's reading of -35 percent). This disconnect is in part natural "“ there will always be some sort of lag between what is experienced and expected when the economy is at a turning point. However, the divergence between the expected and experienced readings is the widest it has ever been in the history of the survey. This is telling, and mirrors the divergence between the current and future conditions readings in recent consumer confidence surveys, with the latter rebounding but the former unchanged and it is the former that drives the actual spending decision.  Hence, while a better feel-good factor is percolating there are aspects that appear to lack substance and are based on expectations as opposed to reality.  This dichotomy will be key to watch going forward. Within an improving trend, there remains a clear undertone of cautiousness. Employment, profit expectations and investment intentions have all recovered off nadirs.  Yet all remained firmly negative in Q3 suggesting underlying pressure remains.  In fact, builders reported laying off more staff in the past quarter than in Q2 "“ bucking the trend across other sectors.  Perhaps an indication that while residential construction is set to pick up, commercial construction faces a step-down in activity in the year ahead.  Retailers are not yet confident enough to rebuild stock levels, with overseas orders up only marginally on the previous quarter (-32 percent from -43 percent).  Sales remains the key factor restraining growth, with 74 percent of firms stating that it is their biggest constraint.  However, we also note that there was a reasonable increase (from 6 to 10 percent) stating that finance was a constraint and this is something we will be watching closely going forward. We respect what leading indicators such as today's numbers are telling us and expect economic momentum to begin to build over the latter part of this year and into 2010. We have pencilled in a solid recovery in H2 and particularly Q4. Yet today's survey also portends of considerable caution. This is in part a reflection of the natural lagging relationship between some key indicators such as employment and growth.  But the magnitude of the gap is flagging deeper forces at work.  Profits remain under pressure, and in that environment firms are naturally reticent to commit to investing and hiring.  Sectoral divergences will still be present and this is no better shown than by architects' expectations for the coming two years with government work in positive territory, housing flat, and commercial lagging.  It is also interesting to see that those manufacturers and builders reporting stock levels too high has only eased back to long-run average levels, which may imply that a pending inventory cycle in NZ may not be as pronounced.  Time and time again confidence surveys have proven to be accurate barometers and we need to respect the nuances.  However, it remains to be seen how much of the improvement in confidence (a decade high) merely reflects the fact that the economy is looking up from a deep hole in the first place. For the RBNZ, we see the survey as reinforcing their September message.  Inflation does not look to be a near-term concern. Gauges of resource pressure remain soft.  The CUBO eased from 90.7 percent in the previous quarter, to 88.4 percent.  Recent volatility looks to be a consequence of changes in exporters' capacity.  Firms continue to report it easy to find skilled and unskilled staff (25 and 48 percent respectively), suggesting wage growth will continue to moderate.  While cost pressures are slowly rising, with a net 19 percent experiencing higher costs over the past three months, the economic backdrop appears to be making it difficult for firms to pass these on.  A net 5 percent of firms reported lower selling prices in the past three months. With uncertainty high and cautiousness remaining, we see the RBNZ holding pat on their low for an extended period view on interest rates.