Conflict threat hits confidence

By BRIAN FALLOW

Uncertainty about the implications of a war in Iraq has sent business confidence deeper into pessimistic territory in the National Bank's latest survey.

"Normally after the Christmas break the business community is very upbeat," the bank's chief economist, Dr John McDermott, said, "but this February, confidence has fallen, to a net 16 per cent of respondents expecting conditions to deteriorate, from a net 8 per cent at the end of last year."

As a general rule, respondents' expectations about the general business climate and about the outlook for their own firms move in the same direction, but this time the own-activity indicator improved, from a net 24 per cent positive in December to 27 per cent now.

McDermott said that when the two moved in opposite directions it was a sign that firms were nervous about the international situation but unclear about how it would affect them.

Despite a sickly global economy, New Zealand business had been doing well over the past year or so, he said. The economy's immune system had worked well.

But now, one key element of the immune system, the exchange rate, was working against us.

The stronger kiwi dollar is not expected to hurt export volumes (expectations in that respect improved slightly) but will hit revenues and profits.

Investment intentions have weakened a little, despite the exchange rate making imported capital plant cheaper.

Geopolitical uncertainty explained a lot of that, McDermott said.

Hiring intentions were unchanged.

The big change from the previous survey in December is in interest rate expectations, from a net 17 per cent expecting them to rise to a net 9 per cent now expecting them to fall, over the coming year.

"It's a remarkable change in expectations given the strength of the domestic economy - a change brought about in large part by concerns about the rising New Zealand dollar."

McDermott said the respondents were right to expect rates to fall, but it would be much later in the year.

* Meanwhile, the manufacturing sector is losing momentum, according to the ANZ-Business New Zealand Performance of Manufacturing Index (PMI).

The PMI has fallen for the second survey in a row, though it is still at a level that implies moderate expansion.

As in December, micro firms (up to 10 employees) experienced a decline in overall activity.

There was a noticeable increase in the number of respondents commenting on the strength of the New Zealand dollar, especially against that of Australia's.