Agriculture leads way as confidence tracks higher

By BRIAN FALLOW

Business confidence is on the mend, with the National Bank's September survey building on the rebound recorded in August.

However, firms' views about the general economic situation over the coming year remain negative, with 27.3 per cent of respondents expecting it to get worse and 15.7 per cent expecting an improvement.

The net 11.6 per cent of pessimists compares with a net 20.7 per cent last month and a net 30.9 per cent in August.

Respondents' view of their own prospects are largely unchanged from last month. Their profit expectations, and investment and hiring intentions remained at or below their long-run trend, said National Bank economist Cameron Bagrie.

"Firms' own activity expectations are consistent with a solid but not stellar economy and an easing of the frenetic pace seen in the first half of the year."

The lift in confidence occurred across the board but was strongest in the agricultural sector, where it improved from a net 50 per cent pessimistic to a net 31 per cent. Bagrie attributed this to a lift in dairy prices over the past couple of months, but said the risk that European and American export subsidies could depress prices remained.

"We've got a two-speed economy," Bagrie said.

Indicators from the earning sectors of the economy, such as own-firm business confidence, commodity prices and tourist inflows, are at a level suggesting gross domestic product growth of around 2 per cent for the next year.

By contrast the spending sectors, as reflected in consumer confidence, retail sales and house market activity, suggest GDP growth of 3 per cent or better.

"We think the upshot will be somewhere between those two, around 2.5 per cent growth over 2003."

The high commodity prices and weak dollar that insulated New Zealand from the global downturn over 2001 and 2002 no longer applied.

And as for the "bubbly" domestic economy, we could not continually borrow our way to growth, Bagrie said. Eventually the spending sectors would come into line with the earning sectors.

"The economic fundamentals are still pretty favourable for the earning sectors, but they are being a little bit cautious."

The caution was understandable given an international environment overshadowed by volatile sharemarkets, fraud and accounting scandals, terrorism and the threat of war in the Middle East.

"With strong domestic growth being offset by adverse external influences of one form or another, the Reserve Bank will keep interest rates on hold for the rest of the year," Bagrie said.

A net 25 per cent of the survey's respondents expect rates to go up, but that compares with a net 87 per cent in April. Nearly half expect rates to remain steady over the next 12 months.