Businesses buoyed as fears fade

By BRIAN FALLOW

Business confidence took an unseasonable turn for the better this month as concerns about the Sars virus and electricity shortages dissipated.

The National Bank's survey found 45 per cent of respondents expected the general business situation to deteriorate over the next 12 months, while 12 per cent expected it to get better.

The resulting net 33 per cent pessimistic represents the third-weakest confidence level in the past three years, but it is an improvement from last month, when a net 44 per cent expected a deterioration.

National Bank chief economist John McDermott said the result was "quite a decent" recovery, all the more notable because the mid-winter blues normally pushed sentiment down.

It is the first time in five years that business confidence has improved between May and June.

When companies responded to the survey's questions about their own prospects and intentions, the results were generally better, or at least no worse, than they were last month.

A net 10 per cent expect their activity to increase over the year ahead, compared with a net 9 per cent positive in May.

"The retail, construction and service sectors - all dependent on domestic demand for growth - showed improvements in their own activity outlook," McDermott said.

"In contrast, the manufacturing and agricultural sectors, which have a significant export orientation, recorded declines."

Investment and hiring intentions are up across the board, and profit expectations rose in every sector except construction.

Export order-books continue to look worse, however, with a net 8 per cent expecting improvement, down from 15 per cent last month.

The outlook for residential construction has also deteriorated this year, but from a high level in 2001 and last year.

Businesses expect interest rates to fall further.

Reserve Bank Governor Alan Bollard, in London for a meeting of central bankers, reiterated on Wednesday that the bank's forecasts were consistent with a further cut in interest rates this year but he was unforthcoming about the prospect of anything beyond that.

The Reserve Bank's monetary policy statement on June 5 said the drop in general business confidence had been exaggerated by concerns about the war in Iraq, Sars and early signs of power shortages, and it should rebound.

McDermott said those factors would be reflected in a negative gross domestic product result for the June quarter, but just as the weakness in confidence foreshadowed that dip, the latest rebound would give the Reserve Bank comfort that the recovery in growth it expected would eventuate as well.

The National Bank forecasts GDP growth of about 2.5 per cent this year, down from 4.4 per cent last year.

Meanwhile, a barometer of manufacturing has improved but still indicates a mild contraction in the sector.

The ANZ-Business New Zealand performance of manufacturing index rose 0.3 points to 49.6 last month.

A level below 50 implies a contraction in activity.