Grim sentiment prevails in latest survey

The picture of business sentiment in the New Zealand Institute of Economic Research's latest survey is comprehensively grim as firms confront weak demand and shrinking profitability.

Never has the gap been so wide between what they expected and what they subsequently report happened.

Their reported activity over the past three months - the indicator with the closest relationship to gross domestic product - dropped from a net 4 per cent reporting a decline in the June survey to a net 15 per cent in September.

That was consistent with GDP contracting by 0.2 per cent in the quarter, said NZIER principal economist Shamubeel Eaqub, and the timing of the survey means it does not capture the expected drop in activity from the Canterbury earthquake.

The recovery was proving to be a "shallow, stumbling" one.

"It's not frightening, but the risk of a double dip has risen quite a bit. The fact that it went backwards even before the earthquake suggests the economy is in a very weak place and the Reserve Bank's decision to pause was definitely the right one."

A net 6 per cent of firms still expect the general business situation to improve, but that is down from a net 18 per cent in June.

Adjusted for seasonal effects the decline in "headline" confidence is steeper still, from a net 29 per cent positive in June, to a net 9 per cent negative in September.

One of the questions the survey asks firms is what factor is most constraining their ability to lift production or activity.

In the two previous recoveries, in the early 1990s and after the Asian crisis, a lack of demand steadily declined in importance as the recovery progressed, while supply-side factors like the availability of labour or physical capacity grew more important.

But this time the proportion of firms citing sales, or the level of demand, as the main constraint has remained stuck at recessionary levels.

Among manufacturers, for the second quarter in a row more reported declining than increasing output.

Domestic sales are weak while only a bare plurality (a net 3 per cent) of exporting manufacturers report higher sales. Manufacturers' profitability and investment intentions both eased.

The building sector was in free fall, Eaqub said, with output, new orders, profitability and employment all falling steeply. The slowdown appeared to have caught firms by surprise, as stocks of building materials soared.

These readings have yet to show the impact of the earthquake.

Retailers are still finding the going hard. A net 19 per cent reported lower sales over the past three months compared with a net 6 per cent going backwards in the June survey.

"There seems little evidence of a pre-GST spend-up by households," Eaqub said.

Services, the largest sector, exhibited renewed weakness across several indicators, especially output and profitability. Overall, a net 30 per cent of firms in the survey reported declining profitability, compared with a net 16 per cent negative in June. Profit expectations have also declined.

Hiring intentions picked up - to the highest level since December 2007 - but actual hiring declined.

BNZ economist Craig Ebert said growth indicators would look not so awful before too much longer, underpinned by tax cuts, buoyant commodity prices, rebuilding work in Canterbury and later the Rugby World Cup.