Business confidence collapses record amount in October

The National Bank's Business Outlook Survey for October found a record fall in business confidence about the economy generally and for business' own outlooks as financial markets plunged and the Northern Hemisphere's banking system survived collapse by a whisker. ANZ National's economists described the move as a "plunge" and gave the following advice on its report: "Warning: this report may be damaging to your health. Lock away all sharp objects and pills before reading." ANZ National said the survey made for grim reading and predicted it was now possible fourth quarter GDP would show a negative reading, capping a full year of recession. Here are ANZ National's comments in full below.

In terms of the key survey indicators, a net 42 percent of respondents now expect general business conditions to deteriorate over the coming year. That's a massive 44 point turnaround from September and is the largest one month fall in the history of the survey. Firms' own activity expectations fell from plus 17 to minus 11, the second lowest on record (previously the first survey in April 1988), but the largest one month decline. Employment intentions dropped to a historical low. A net 21 percent of respondents expected fewer staff, down 15 points. The negative streak for employment has extended to nine months. Investment intentions are now minus 13, and profit expectations fell to a net minus 32 percent. Export intentions fell from plus 29 to plus 11. First up we need to keep a sense of perspective. It was somewhat surprising to see confidence recovering to the extent it had over the preceding months, and this "base" effect likely exaggerated the intra-monthly movements in the survey's indicators. A large chunk of the hand-wringing in this month's survey is likely also due to uncertainty itself, which brings no good to anyone. No one can be blamed for not knowing what to make of it all, or what to do next. Facing exceptional times we should hardly be surprised to see exceptional movements in confidence, and we've already seen a number of international surveys hit or approach historical nadirs. However, there is no doubting the underlying messages. We've almost had to rescale the chart which shows our composite growth indicator from the survey versus GDP (refer below). On the assumption weakness in the partial gauges from the survey remains at these levels for another couple of months (we need to be coy about making sweeping assessments off one month's data, although the movement itself is impossible to dismiss), the economy is set to contract further, and not by a small amount. In terms of quarterly GDP outturns, attention now turns to the December quarter, and probability of a fourth negative quarter. Employment intentions from the survey are giving an ominous reading on the labour market, and looks the next leg of the cycle to watch. On a more encouraging note, pricing intentions have fallen to the lowest level in 3 years, and indicate the headline inflation rate is set to fall sharply. Collectively, we take today's survey as reinforcing a couple of key themes. The RBNZ has a lot of work ahead of itself in order to stabilise the macro environment. Of course the best the Reserve Bank can do is take the edge of the extremes in the cycle, but weak growth, and receding pricing gauges suggest a lot of latitude to continue lowering the OCR. We continue to envisage the cash rate ending up below 5 percent. When it comes to the general New Zealand economy, there is no doubt the outlook will be challenging (a likely understatement). Inflation will not remain elevated in such an environment, although we need to acknowledge that petrol price movements both up and down do influence pricing intentions. It continues to amaze us why the NZD/AUD remains so lofty given the contrasting economic pictures between the two nations.