Despondency abounds

By BRIAN FALLOW economics editor

Business confidence has sunk to levels normally associated with little or no growth in the economy.

Most respondents are despondent in the National Bank's monthly survey, with 52 per cent expecting general business conditions to worsen and only 10 per cent expecting them to improve.

The net 42 per cent pessimistic result compares with a net 33 per cent last month and is the lowest business confidence has been since the winter of discontent in 2000.

All the indicators in the bank's survey have deteriorated including export and profit expectations, and hiring and investment intentions.

Firms' expectations of their own activity - a closely watched indicator - have fallen from a net 20 per cent expecting improvement last month to a net 7 per cent.

That was a level typically, though not invariably, seen at times of little or no growth in real gross domestic product, said National Bank chief economist Dr John McDermott.

"I am not suggesting we have stepped into a recession," he said.

"But the party is over and it is not surprising business feels deflated."

The economy was losing momentum and decelerating after the drivers of last year's 4.4 per cent growth, such as a commodity boom, shut down.

On top of that, it had run into a series of speed bumps: drought, the war in Iraq, a looming power crisis and the Sars virus.

Nervousness about such factors would reduce demand by making people more reluctant to spend.

"The Reserve Bank has already judged it can ease that process by cutting interest rates."

McDermott expects the central bank to follow last week's 25 basis point cut by two more, in June and July.

"At that point they will probably take a breather and reassess where the world is."

The US has just recorded a disappointing annualised growth rate of 1.6 per cent in the March quarter. Europe and Japan are in even worse shape and China is beset by Sars.

"Against that backdrop, back in New Zealand, when all the insulation of high commodity prices has been removed, we will now start feeling the headwinds as we go through the year. It will be a hard slog from this point onwards," McDermott said.

The decline in business confidence was the third in a row and was broad based. The retail, manufacturing, agriculture, construction and services sectors were all down.

Only a net 5 per cent of respondents in retail expect their own activity to increase in the next 12 months, down from 15 per cent in March. Annual growth in retail sales has been tapering off.

In construction, a net 8 per cent expect their own activity to fall over the year ahead, down from 14 per cent last month.

"This result is hardly surprising since the latest building consents data indicate that, while at dizzyingly high levels, the building boom is slowing.

"The number of new dwelling units fell by 15 per cent seasonally adjusted, largely due to a drop in apartments."

In agriculture, a net 9 per cent expect their own activity to lift in the year ahead (10 per cent in March).

McDermott said the subdued mood on the farm was due in part to the strong New Zealand dollar and moderating commodity returns.