Business confidence rises after five gloomy months

National Bank chief economist Cameron Bagrie Photo / Mark Mitchell

Business confidence has taken a turn for the better, the National Bank's October survey recording its first rise after five straight months of decline.

A net 24 per cent of firms expect general business conditions to improve over the next 12 months, up from a net 14 per cent optimistic last month.

Some of the improvement might be seasonal, the bank's chief economist, Cameron Bagrie, said, as there is normally a feel-good bounce in spring.

And some of it might be a Canterbury effect, where after last month's earthquake people reckon things can only get better. A net 56 per cent of Canterbury respondents expect better times for their firm in the year ahead.

The glass-half-empty view is that if you take the Canterbury movements out there is little change in sentiment overall, he said.

"But it has arrested five months of moving in the other direction, so we will take it as a positive."

A net 31 per cent of firms expect an improvement for their own business over the year ahead, up four points on September. Even when seasonally adjusted the net response to that question is within striking distance (three points) of the long-run average.

Consistent with that improvement, profit expectations, hiring and investment intentions also improved.

A net 10 per cent of firms expect profits to rise, compared with a net 3 per cent last month. A net 8 per cent expect to be hiring staff over the coming year, up from 1 per cent. And a net 4 per cent intend to invest more, up on 2 per cent last month.

The movements still appeared cautious but the direction suggested a bottom might have been reached in September, Bagrie said.

"The undertones still look a bit sketchy," he said. "Firms are not seeing enough demand to think about passing on price increases."

A net 25 per cent of firms intend to raise their own prices over the next three months - a 10-month low - down from a net 30 per cent last month.

Inflation expectations have also eased slightly, though they remain close to 3 per cent, the top of the Reserve Bank's target band.

The threat of this month's GST increase turning into persistent inflation appeared minimal, which would allow the bank to keep interest rates at supportive levels for some time, he said.

Even with the expected steep increase in Canterbury, residential construction expectations fell by 5 points to a 9 per cent positive and remain, like commercial construction expectations, well below levels prevailing for most of the past year.

Another area to go backwards is export expectations.

A net 20 per cent of exporters expect to ship more (the question is about volumes not values) over the year ahead, down from a net 32 per cent last month.

"We have been surprised how resilient it was and then all of a sudden you get to a point where the squeeze sort of starts to come on," Bagrie said.

"After months of shrugging off the steady rise in the exchange rate, the breach of 75c against the US dollar appears to have been a tipping point."

But the impact depended on what a firm exported and to whom, he said.

Export commodity prices are high by historical standards and the increase has been broader-based than it was two and half years ago when dairy prices dominated.

Firms' views about the unemployment rate dropped to a net 8 per cent expecting an improvement from 19 per cent last month.