Business confidence dipped slightly in October from September after a "meteoric rise" over recent months, the National Bank Business Outlook Survey showed. A net 57% of respondents expect interest rates to rise over the next year, while the figures point to annual GDP growth of between 2.5% and 4%, the same as in September. (Update 3 includes ASB economist comment.) A net 48% of respondents said they expected better times in the year ahead, down from a net 49% in September. Firms' own activity outlook also dipped slightly, with a net 31% expecting better times over the next year, compared to net 32% last month. "It is hard to describe the readings as anything other than stabilising at elevated levels," National Bank economist Cameron Bagrie said. "The construction sector continues to set the bar in terms of poise, with a net 75 percent expecting better times ahead. Conversely, confidence eased across the service, retail and manufacturing industries. Despite the turn, the level remains robust and healthy," Bagrie said. "Profit expectations continue to lift. A net 12 percent expect a better bottom line over the coming 12 months "” the best reading in 5 years. This is encouraging in terms of driving the next leg of the economic cycle, namely investment and jobs," he said. "Investment intentions have risen 4 percentage points to +6. Conversely, employment intentions dipped 2 percentage points to zero. The movements are well within the normal volatility we would expect from month-to-month. Yet the movements portend of a lack of conviction when it comes to committing cold hard cash to areas such as employment and investment. Balance sheet consolidation and de-leveraging continue to dominate." "Growth readings from the survey are unchanged on the month prior. Firms' own activity expectations are flagging 4 percent growth. Our composite growth indicator from the survey is gradually gaining momentum and pointing to 2½ percent growth," he said. "Looking across the survey we are wary of drawing strong conclusions when we look at both the levels and changes in key variables." "Agriculture generally remains at the less optimistic end. The service industry showed the largest dip in firms' own activity expectations and employment, and failed to follow the aggregate lift in investment and profits. Levels are not portending of anything telling (excluding employment). Until we see a few more months of data, we'll reserve judgement on the sectoral mix. Suffice to say that growth in this month's survey looks marginally narrower than in the months prior." A net 57% of respondents said they expected interest rates to rise over the year, from net 48% in September. "With momentum improving across the economy, it is inevitable that interest rates will rise from the extraordinary low levels they currently reside. To what degree and when this occurs remain subject to debate," Bagrie said. "It is at this juncture that monetary policy needs mates. The Reserve Bank has limited control over the currency, but there is no need to risk inflaming the meteoric rise seen to date. In the early stages of the cycle it is preferable for fiscal policy to take the lead in unwinding policy stimulus." "The Minister of Finance has indeed flagged a sustained period of fiscal restraint so as not to burden the next generation with excessive debt. This will involve small tax changes (think ACC levies) and less spending (we pay if we want the service). The government balance sheet improves, but at the expense of the private sector's. Unpopular for sure, but probably marginally less so than seeing interest rates knock the tradable sector into submission or unfairly burdening the next generation with debt." Here is ASB economist Jane Turner's take on the figures:
Although the headline confidence has surged, the pick up underlying indicators (such as profitability, investment and employment intentions) has been much more muted. These indicators are more consistent with an economy that has only just managed to stabilise and not yet poised to stage a strong recovery. Although confidence on its own would point to a recovery in annual growth of 4%, we look to the underlying picture to confirm our view of a more gradual recovery. The RBNZ has faced a steady stream of stronger than expected data over the past 6 weeks, including stronger than expected GDP, inflation pressures, and global outlook. The ongoing robustness in consumer and business confidence adds further confirmation of an economy exiting recession earlier than expected. At tomorrow's OCR review the RBNZ will need to acknowledge this recent strength and accept that it is likely to increase the OCR earlier than in previously expected. Nonetheless, the outlook remains fragile, with the strong NZD continuing to place pressure on the export sector. The economy remains in need of ongoing policy support, and we expect the RBNZ will continue to hold the OCR at 2.5% until April 2010.