Business confidence drops significantly as economic pulse slows

Falling dairy prices are exacerbated by the still high dollar. Photo / Bloomberg

Business confidence has slumped in the latest ANZ monthly survey.

A net 33 per cent of firms expect their own activity to increase over the coming year, down nine points on the April survey to a two-year low for the survey indicator which is the best pointer to economic growth.

Almost all the survey's gauges deteriorated including profit and export expectations, and hiring, investment and pricing intentions.

Most of the indicators are still north of their historical averages, said ANZ chief economist Cameron Bagrie.

"But the economic pulse is not beating quite as strongly. On many levels that's not surprising. The economy is transitioning into a more modest pace of expansion," he said.

"However, there are clear risks around that transition. Declines were broad across the survey and are starting to look more trend-like."

Sentiment was weakest in the agriculture sector which recorded the lowest level of confidence, activity expectations, profitability or lack of it and investment.

"There are few surprises here," Bagrie said. "The New Zealand dollar is still high and it's not just dairy prices that have been receding."

But in the construction sector activity outlook was down 16 points, profitability down 12 points, employment down 16 points and investment down 23 points.

"It may be simply a case of a levelling out dynamic," Bagrie said. "It's hard to maintain highs in a survey that asks if things are going to get better or worse. For many in construction things are pretty damned good right now."

But it might also indicate that capacity constraints in the construction sector are biting or that the incremental stimulus from the construction pipeline in Christchurch and Auckland is easing.

Inflation expectations, which are being closely watched by the Reserve Bank, fell to a new low of 1.62 per cent from 1.76 per cent in the April survey.

A low headline inflation rate - the consumers price index rose just 0.1 per cent in the year to March - would be playing a role, Bagrie said. "But it's notable that inflation expectations are tracking below the inflation target midpoint [of 2 per cent]. That's unusual."

A net 16 per cent of firms expect general business conditions to have improved in 12 months, down from a net 30 per cent in April.

Confidence fell to a similar level in the September quarter last year, Bagrie notes, but the drivers were obvious then.

"Interest rates had been lifted 100 basis points and the New Zealand dollar was high. Dairy prices had given way. We now have the same dairy dynamic but a weaker currency, and wholesale interest rates are lower too. The fact that confidence is still retreating signifies that neither has yet moved sufficiently to fully act as a bad news offset."

Confidence falls

• Net 33% of firms expect activity to increase over the coming year, a two-year low for the survey indicator.
• Net 16% of firms expect general business conditions to improve in 12 months' time, down from a net 30% in April.