Business outlook warms as petrol falls

Business confidence continues to rise as firms give more weight to stimulus from lower petrol prices than to the dampening effects of a higher dollar.

The National Bank's monthly survey found pessimists (36 per cent) outnumbering optimists (14 per cent) about the general business outlook, but the net 22 per cent who are gloomy is an improvement from a net 29 per cent last month and is the highest confidence has been for 18 months.

Firms' views of their own prospects - a more reliable indicator of the economic outlook - have also improved, with a net 18 per cent expecting activity to pick up compared with 15 per cent last month.

Profit expectations, while still negative, are the best they have been for 13 months and employment intentions the strongest for 19 months.

The bank's chief economist, Cameron Bagrie, said the impact of a 33c fall in petrol prices between mid-August and mid-October - leaving more money in people's pockets and relieving pressure on business profit margins - had outweighed the effects of a stronger exchange rate.

Export intentions had eased back but were still holding pretty well in this as in other surveys, Bagrie said. "People don't like it [the stronger dollar] but it is not a disaster."

The proportion of firms planning to raise their prices, net of those expecting to drop them, was 26 per cent, down from 28 per cent in September, the fourth decline in a row.

While the Reserve Bank would welcome that trend, Bagrie said, there was a troubling split between the tradeables and non-tradeables sectors in pricing intentions.

Firms more exposed to the domestic economy, in the construction or services sectors, showed a rise in pricing intentions, while those affected by the currency - such as retailers, manufacturers and agricultural firms - showed declines.

Pricing intentions in the construction sector, an inflationary hotspot, have risen to a six-month high. Building consents issuance continued to rise last month, Statistics New Zealand reported.

Aggressive discounting by banks was dampening the impact of higher interest rates on debt-servicing costs, Bagrie said.

"The growing divide between the tradeables and non-tradeables sectors of the economy is disconcerting, particularly given the persistence of domestic inflationary pressure," he said.

"The divide will only grow wider with stronger domestic growth, resulting in an even larger current account deficit [now 9.7 per cent of GDP]."

The economy was growing at about a 2 per cent annual rate but employment had been growing significantly faster - 3 or 3.5 per cent - reflecting a reluctance on the part of businesses to shed labour for fear they might not be able to replace it when things picked up.

Bagrie said the missing factor in shifting the slowdown from the tradeables to the non-tradeables sector and achieving better-balanced growth was a downturn in the labour market.