Dip in recovery of confidence

By BRIAN FALLOW economics editor

The recovery in business confidence stalled this month, at levels suggesting slightly below average economic growth over the next 12 months.

In the National Bank's October survey pessimists marginally outnumber optimists: a net 1 per cent of respondents expect general business conditions to worsen over the year ahead, from a net 3 per cent last month.

Other indicators in the survey were also little changed. Firms' expectations of their own activity and their profits were down, but investment and hiring intentions improved. Export volume expectations stood still.

But the interest rate outlook darkened, from a net 14 per cent expecting rates to rise last month to a net 24 per cent this time, even though the survey took place before the Reserve Bank signalled it would tighten the reins early next year.

Fewer firms expect to raise their prices, a net 12 per cent against 15 per cent in September.

The National Bank's chief economist, Dr John McDermott, said those levels were consistent with a slight pick-up in inflation from the current 1.5 per cent to 2 per cent - bang in the middle of the Reserve Bank's target range.

Sentiment had been rebounding from the gloom of the June quarter: the survey troughed at a net 44 per cent of pessimists in May.

The stalling of that recovery most likely reflected the prospect of higher interest rates, together with the New Zealand dollar's continued appreciation against the United States dollar, McDermott said.

The survey results are consistent with growth running about 2.5 per cent over the next 12 months - below potential but a soft landing from the strong growth of the past year or two.

"It's okay. It's plodding along, but it's not on fire," he said.

McDermott believes interest rates are appropriate for the economic conditions. But financial markets are betting on rate rises early next year and last week Reserve Bank Governor Alan Bollard endorsed the market's view.

But McDermott said the aggressive tightening track priced in by the market was not consistent with the Reserve Bank's forecasts only last month, and it was not obvious what had changed in the meantime to warrant an earlier tightening.

"Not much has changed domestically. And while the United States is being regarded in a more positive light and commodity prices have risen in world price terms, the currency has risen as well."

There was no need for the Reserve Bank to be "led around by the nose".