Kiwi dollar's plunge reinforces business

By BRIAN FALLOW

The New Zealand dollar's sharp fall in recent weeks has been mirrored by a steep rise in business confidence.

In the National Bank's monthly survey, 35 per cent of respondent firms expect the general business environment to get worse over the next 12 months, while 13 per cent expect it to get better.

But that net 22 per cent negative reading is an improvement from a net 36 per cent pessimistic last month and a net 42 per cent in March.

"We attribute almost all of the rebound to the exchange rate," said National Bank chief economist Dr John McDermott.

Given the resilience the economy has shown over the past two years confidence should not have been as low as it was.

While the "headline" confidence reading is volatile and thrown around by the news flow, what firms say about their own activity gives a more reliable reading of the short-term outlook for economic growth.

A net 25 per cent of firms expect their own activity to improve in the year ahead, up from 20 per cent last month. That suggests economic growth will be at a sustainable rate, McDermott said, that is, just a touch below 3 per cent.

Firms' positive view of their own outlook is reflected in hiring and investment intentions.

A net 12 per cent of firms expect to increase staff levels, up from a net 5 per cent last month. "Employment intentions have been positive for the past 12 months and many firms are still reporting that finding appropriately skilled staff is their most difficult problem."

A net 18 per cent of firms plan to increase investment, roughly the same level as for the past year.

"Investment is being constrained by concerns about economic growth easing back somewhat, uncertainty over geopolitical events and the retreat in the New Zealand dollar increasing the price of imported plant and machinery. On the other hand investment is being boosted by a relatively low cost of capital," McDermott said.

The bad news, at least from the Reserve Bank's point of view, is the rise evident this year and continued this month in the number of firms intending to raise their prices.

That is consistent with official data showing inflation in the domestically focused part of the economy running at around 5 per cent.

The offsetting disinflation from the tradeables sector can now be expected to weaken along with the exchange rate.