Manufacturers lead general fall in business confidence

By BRIAN FALLOW

The rural sector is in better heart than last month but manufacturers are gloomier, the National Bank's business confidence survey has found.

Sentiment about general business conditions deteriorated, with a net 21 per cent of firms pessimistic compared with a net 15 per cent in August.

The decline in confidence was across all sectors of the economy but heaviest among manufacturers (exposed to the high New Zealand-Australian exchange rate) and the construction sector (exposed to rising interest rates).

As usual, firms are much more positive about their own prospects than about the general environment. A net 21 per cent of respondents expect their own activity to improve, up fractionally on last month and in line with the long-run average for that indicator.

National Bank chief economist John McDermott said over the past 20 years the own-activity measure had been a reliable indicator of the state of the business cycle.

A value around its long-run average suggested continued momentum in the economy, after 2 1/2 years of above-trend growth.

Firms in the agriculture sector, buoyed by high commodity prices, were more positive than last month about their export prospects and profitability.

But McDermott said there was a sharp contrast between the improving confidence of the rural community and the declining confidence of manufacturers.

"The high cross rate [with the Australian dollar] is starting to bite as forward cover starts to roll off. Life is pretty tough when you are selling to the Australian market at that exchange rate and competing with all those global suppliers."

A net 19 per cent of manufacturers expect their own activity to improve, steady on last month's level but down from 33 per cent at the start of the year.

Manufacturers also reported sharply lower profit expectations this month.

Potentially significant is a slight drop in the proportion of firms intending to raise their prices. Before this month, that indicator, closely watched by the Reserve Bank, had been climbing all year.