Confidence hits pre-terror levels

By BRIAN FALLOW economics editor

Business confidence rebounded last month and is now back where it was before the attacks of September 11, a National Bank survey shows.

A net 16 per cent of respondents expect the general business environment to improve over the coming year, up from a net 2 per cent in the last survey in December and a net 19 per cent pessimistic in the wake of the terrorist atrocities in the US.

The improvement in sentiment is spread across all sectors except agriculture, which is coming off a very favourable base.

It is reflected in improved investment and hiring intentions, improved profit expectations and an above-average reading for firms' own activity outlook.

"It continues the run of positive economic activity indicators we have had from the fourth quarter of 2001," said National Bank treasury economist Joselyn Stroombergen. "New Zealanders have taken to low interest rates like a duck to water. Consumer confidence is also up, employment and income growth are good, activity in the housing market is brisk and shoppers have been spending freely."

The indicators are consistent with an economy growing at an annual pace of around 3 per cent, she said.

While that was faster growth than the economy had managed to sustain through the 1990s (around 2.5 per cent), it was probably not breaking the speed limit now because the turnaround in immigration had boosted the labour force and with it the economy's growth potential.

The net flow of long-term migrants last year was a gain of 9700, the highest since 1996.

The construction, service and retail sectors would benefit most from these trends as new arrivals needed housing and new houses needed to be furnished, the bank said.

The participation rate (the proportion of the labour force either working or actively seeking work) was at a 15-year high so it looked as if the economy was able to make use of the expanded labour supply and had increased its potential growth rate.

A net 13 per cent of firms in the latest survey expect to increase employment, up from a net 7 per cent at the end of last year.

While the Reserve Bank should take comfort from that, and from the steady decline in inflation expectations over the past year or so, the latest survey also records a rise in the proportion of firms expecting to raise their prices over the next three months, to a net 21 per cent from 16 per cent in December.



By the end of the year the National Bank expects governor Don Brash to have taken back all of the "insurance" rate cuts he made after September 11, returning the official cash rate from 4.75 per cent now to a more neutral 6 per cent.

For the third successive survey firms' investment intentions have improved. Among manufacturers a net 30 per cent expect to increase investment spending. This is despite a fall in their expected export volumes.

Joselyn Stroombergen said that over the past month or so there had been signs that the global economy was turning up, a perception that had yet to be reflected in business sentiment here.

International consensus forecasts for growth among our trading partners had at least stabilised since last year. "Though 2002 may be a bit soft, expectations for 2003 are being revised up all the time and it looks like being back to normal."