Now we are in a 'normal' recession

Business confidence has rebounded strongly from the worst-ever levels recorded in the first few months of the year to levels consistent with a "normal" recession, according to the New Zealand Institute for Economic Research.

The headline general business confidence measure in the institute's Quarterly Survey of Business Opinion - the net proportion of firms expecting general business conditions to deteriorate - improved from its lowest ebb of 65 per cent for the previous quarter to 25 per cent in the three months to June.

The more telling measure of firms' domestic trading activity, which is closely correlated to economic growth, had "improved markedly" from the April quarter, said institute chief executive Jean Pierre de Raad.

However it was "particularly weak", with a net 36 per cent reporting a decline over the past three months.

"On the basis of what we see here we wouldn't change our forecast for another two quarters of negative growth followed by an improvement in the December quarter."

ANZ National Bank economist Khoon Goh said the key message from the findings was "we are back to facing a "normal" recession as opposed to something far more damaging".

The improvement in the domestic trading activity measure suggested the 1 per cent contraction in the December and February quarters would mark the low point for the cycle.

Like the NZIER, ANZ National expected "more modest contractions" in second and third quarter gross domestic product data, but "at the rate the dataflow has been improving, we could well see the official end to this recession in the fourth quarter".

The improvement in general confidence was seen across all regions and sectors and should be seen in a positive light said Goh, but the lift was off extreme lows and all key measures remained in negative territory.

Employment and investment intentions remained negative with a net 31 per cent of the 3500 firms surveyed having laid off staff in the last three months and a net 19 per cent intending to cut staff during this quarter.

"Households have not yet felt the full impact of this recession," said de Raad. "These data still point to an increase in unemployment."

The institute forecasts unemployment to rise to 7.8 per cent next year.

A big increase was seen in the capacity utilisation measure, and while the institute said this suggested firms were running leaner operations by trimming staff and investment, bank economists were less convinced.

"While this is probably having some effect, the turnaround is somewhat swift to be entirely driven by this type of response," said ASB chief economist Nick Tuffley. "We discount this volatility to some extent and note that other indicators are pointing to a significant degree of slack in the economy."

NZIER included questions about credit conditions, and contrary to other research including a survey by the New Zealand Manufacturers and Exporters Association, firms did not indicate they were finding it difficult to access credit. However, firms did report a tightening of terms and conditions by lenders.

Tuffley said the Reserve Bank was likely to take the survey responses as broadly in line with its expectations for the economy and most indicators still pointed to subdued price and cost pressures in the second half.

UBS senior economist Robin Clements said the magnitude of the improvement seen yesterday reduced the possibility of any further official cash rate cuts.

OUTLOOK BRIGHTENS

Quarterly Survey of Business Opinion shows:

* 25 per cent of firms expect general conditions to worsen compared with 65 per cent in March and 64 per cent in December.

* 36 per cent (seasonally adjusted) report their own activity has been lower over the past three months compared with 45 per cent in March.

* 10 per cent expect a decline in their own activity over the next three months.

* 44 per cent report lower profitability in the June quarter compared with 51 per cent in the March quarter.

(These are net figures, calculated by subtracting the number of pessimists from optimists.)