Business keeps its glum face

By BRIAN FALLOW

Business confidence fell again last month, and the National Bank's monthly survey found businesses taking a darker view of their own prospects as well as of the general economic environment.

A net 22 per cent of firms expect economic conditions to worsen over the coming year, compared with 7 per cent in June, and the decline is evident in all parts of the economy.

"Headline" confidence - overall confidence in the business climate - has been falling for four months.

The bank's chief economist, John McDermott, attributes the faltering confidence to falling commodity prices, the strength of the New Zealand dollar and a meltdown in United States sharemarkets.

Dairy prices are down almost 40 per cent from their highs of a year ago, and Fonterra has cut its forecast payout for the new season to $3.70 a kilo of milkfat solids from $5.30 last season.

Reflecting the fall in commodity prices, farmers' confidence in their own prospects was the weakest it had been since the drought of 1998, McDermott said.

Although the NZ dollar has recently lost some of its gains against the US and Australian currencies, it has gained enough to hit exporters.

On a trade-weighted basis it is 10 per cent up on its average last year.

McDermott said this hurt retailers and service industries through lower tourist spending.

Manufacturers' export expectations have also fallen.

Almost all the survey's indicators - profit and export expectations, investment and hiring intentions, residential and non-residential construction - have fallen.

The only one not down is pricing intentions, which is virtually unchanged from last month.

" We are now seeing consistent falls in firms' expectations of their own activity, and they are experts about that," McDermott said.

Although a net 26 per cent expect their activity to increase, that is below the long-run average.

"If history is any guide, these survey results point to an easing in economic growth over the next 12 months.

"But we are talking about a period of sub-trend growth, not recession."

The National Bank predicts growth will slow to 2.5 per cent next year.

McDermott does not believe political uncertainty contributed much to the confidence slump.



Most businesspeople had expected the return of a Labour-led Government.



Consumer confidence, as measured by the Colmar Brunton poll, has also weakened.

It was down to a net 14 per cent positive, from 23 per cent earlier in the month and 27 per cent in June.

Other domestic economic indicators have been mixed.

Housing market activity fell last month - but it usually does and house sales were still the second-highest for a June since 1989.

Building permits for dwellings in the June quarter were 25 per cent up on the same period last year, but permits for non-residential construction were down 2.3 per cent.

Net immigration, a driver of domestic activity, is about 3000 a month. The net inflow in the year to June was a record 33,000.

But overshadowing these domestic factors are the losses on US sharemarkets and the risk they pose to a still tentative global recovery.

"Despite the recent slide in prices, shares still remain overvalued by most measures," McDermott said, "and this is weighing on sentiment worldwide."