NZ business confidence rises, but dips in agriculture and manufacturing (update 1)

Business confidence seems to have left its lows behind it, with the National Bank Business Outlook survey recording its highest reading in July since March 2002. A net 19% of respondents to the survey said they expected better times in the economy overall in the year ahead, up from 6% in June. The survey is watched closely by economists and the Reserve Bank due to its close correlation with GDP growth. (Update 1 includes further comment and employment/profit outlook.) The RBNZ is expected to leave its Official Cash Rate on hold at 2.5% on Thursday and this result is unlikely to change that. But despite the jump in confidence, the National Bank warned that the survey still did not point to a sustainable and quality recovery after the manufacturing and agricultural sectors had falls in confidence in July. "The sectoral breakdown is mixed, with the services sector recording the biggest increase, with retailing and construction also up while the manufacturing and agriculture sectors showed declines. Unfortunately this mix is not what we would refer to as pointing to a sustainable and quality recovery," the National Bank said.

Although firms overall were more upbeat about the general business outlook, they were a little less sure about how their own activity would fare in the coming year, with a net 13% of firms expecting improvements in their own activity over the next 12 months, up from 8% in June. "One interesting observation from this month's survey is the fact that the level of business confidence has exceeded that of firms' activity expectations. This is something that has not occurred for over a decade, with the last time being May 1999," the National Bank said. "No doubt with increasing signs of stabilisation emerging around the globe,and increasing talk of an end to the global recession by year's end, confidence in the future has perked up, even if some are not exactly seeing it in their own business," it said. Employment and profit expectations still remained negative for the year ahead, although both improved over the month. A net 7% of firms said they were still looking to lay off staff in the next 12 months. "Our composite growth indicator "“ which comprises own activity, profit, employment and investment expectations "“ continues to improve and is flagging the possibility that the economy will stop contracting soon. And though it is not suggesting that growth is set to accelerate away anytime soon, it does make a welcome change from worrying about how deep we might fall," National Bank said. "Overall, this month's survey suggests that the light at the end of the recession tunnel may be just around the corner. We are still cautious about the outlook, for we have not really seen the full impact of rising unemployment and reduced rural incomes yet. And the stubbornly elevated New Zealand dollar is obviously not doing our exporters much good. But we have to respect what our respondents are telling us."