Local optimism, national grumpiness

By BRIAN FALLOW

It is no better. It is no worse. It is much the same. Business confidence, that is, as gauged by the National Bank's monthly survey.

A net 25 per cent of firms expect their own activity to pick up over the year ahead (39 per cent expecting an improvement, minus 14 per cent expecting a deterioration).

The bank's chief economist, Dr John McDermott, said that was steady on October and consistent with annual economic growth of about 2.5 per cent.

Over the survey's 21 years, the "own activity" index had proven to be one of the best forecasting tools for the economy, with a far better record than most professional forecasters and policymakers.

Firms' hiring and investment intentions and profit expectations were also virtually unchanged.

Their upbeat assessment of their own outlook continues to contrast, however, with what McDermott describes as an underlying non-specific grumpiness about the economy as a whole.

A net 17 per cent of firms expect the general business environment to get worse, compared to a net 21 per cent pessimistic last month.

Given the strength of the economic indicators and the relative buoyancy of firms' views of their own prospects, McDermott said it was hard to know why their general view of the economy should be so persistently negative.

When the bank asks, as it does every three months, the responses have tended to cite regulatory concerns such as the Resource Management Act or tax compliance costs, and hiring difficulties.

"It's almost as if it it was a protest vote, a way of saying they feel unloved by the Government," he said. "It's not extreme but it is persistent."

A net 28 per cent of firms expect to raise their prices. Although that is below the 30 per cent levels prevailing in June, July and August, it is up on last month.

The effect of the high dollar can be seen in a softening of retailers' pricing intentions (cheaper imports) and a drop in the number of firms expecting to increase exports.

McDermott said the fact that pricing intentions had moderated after rising sharply mid-year should reassure the Reserve Bank that the present level of interest rates will be sufficient to contain inflation within the 1 to 3 per cent target band.