National Bank survey finds business confidence weakened in September; worries about self-fulfilling negativism

Business confidence eased again in September from August, the National Bank's Business Outlook survey found.

ANZ and National Chief Economist Cameron Bagrie said there was a real danger that declining business confidence could become a self-fulfilling prophecy.

Here is the full National Bank Business Outlook release below:

Business confidence continues to ease. A net 14 percent of respondents still expect general business conditions to improve in 12 month’s time, but this is down a further 2 points on the month prior and down 36 points from its peak in February. Firms’ own activity expectations have shown more resilience.

A net 27 percent expect better times for their own business over the year ahead – broadly unchanged on last month. However, this month’s survey result contains a soft underbelly. If we remove seasonal factors, firms’ own activity expectations were down 9 points from a net 28 percent to a net 19 percent. We do not consider the seasonal factors to be 100 percent stable, so we are somewhat coy about jumping to conclusions or making inferences from this.

The fact that a net 19 percent of businesses remain positive about the outlook for their own business is still respectable, though below the historical average of 25. Nonetheless, the directional bias is clear. A mere net 1 percent of firms expect to be hiring staff over the coming year – down 3 points on the month prior. A net 2 percent of firms expect to be investing in building, plant and machinery over the year ahead, down a point on August’s read. Such marginal movements are of course well within the normal volatility of the survey, but more telling has been the broad directional trend with an easing bias apparent now for 4 months. With both employment and investment intentions now centred around zero, the message is clear: businesses consider themselves to be in a holding pattern.

When faced with “unusually uncertain” times, the shutters can come down. From that juncture there is a risk that moderations can become self-fulfilling downturns. We characterise the recent trends in business confidence and the subcomponents as one of reality settling in. That is not to downplay the significance of emerging challenges or the volatility we see from night to night.

But this was never going to be your normal V or martini glass shaped recovery. Balance sheets need to be repaired. Resources mobilised from being overweight on the spending side of the economy to more real and productive earnings centric activities. This process is underway. Income (export) generation is rising.

Ironically, tougher times in 2010 are foretelling of a better 2011. However, a real danger at present is that declining confidence or overly cautious stances become self-fulfilling. There are certainly reasons for caution. Just not of the wrapping in cotton wool or hibernation variety.

Commenting on the result, BNZ Head of Research Stephen Toplis said the result was surprisingly resilient given the events of September.

"This is quite a staggering outcome when you consider that during the month New Zealand experienced the Canterbury earthquake and the demise of South Canterbury Finance," Toplis said.

He pointed, however, to a slide in employment expectations with only a net 0.8% of survey respondents now wanting to take on new staff.

"While this would be negative for our growth expectations, equally it would tend to suggest that labour market constraints are not as great as we have assumed," Toplis said.

"This being so, labour market pressures on general inflation would be reduced leaving the Reserve Bank greater licence to keep interest rates on hold," he said.

"In this regard, it was also notable that business pricing intentions dropped slightly, which is quite amusing immediately prior to the increase in GST. In addition, inflation expectations dropped to 2.94% - a four month low."

OCR hike out to March 2011

JP Morgan economist Helen Kevans said the suggested the GST was likely to have only a muted effect on inflation.

"Until recently, we had forecast that RBNZ Governor Alan Bollard would deliver a further 25bp rate hike in December, but a string of disappointing economic data, combined with the negative impact of the recent earthquake in Christchurch, and a drop in inflation expectations, prompted us to push out our forecast rate hike to March 2011," Kevans said.

"The risks are skewed to a later move should the economic data continue to disappoint. "