Buckling up for hard landing

John McDermott

Businesses are gloomier about their prospects than at any time since the winter of discontent in 2000, according to the National Bank's monthly confidence survey.

Not only are companies deeply gloomy about the general economic outlook, with 13 pessimists for every optimist, their view of their own activity over the coming year has fallen into negative territory for the first time in 5 years with a net 2.4 per cent expecting to go backwards.

"If you took the 20 years' data available for the own activity indicator, this level is pointing to a hard landing - in other words a recession," the bank's chief economist, John McDermott, said.

"Other indicators are not pointing to such a pessimistic out-turn, so I have some sympathy with the Reserve Bank when it says this [the weakness of business confidence] looks to be somewhat exaggerated. But even if we don't think it is the most likely scenario, the risk of that hard landing has increased."

During the so-called winter of discontent in 2000, the domestic side of the economy was under strain with changes to the labour laws and interest rates high, but the export sector was doing well and kept the economy well away from recession, McDermott said. "This time around the export sector is under considerable stress and even domestic businesses are starting to be worried about how things are developing."

With the exchange rate high, wage and energy costs climbing and interest bills rising as fixed-term loans run off, profit margins are being squeezed. A net 24 per cent of firms expect lower profits in the year ahead.

Firms' own activity outlook has been on a pronounced downward trend all year, as have their investment and hiring intentions.

But McDermott said investment and hiring intentions on their own, while subdued, were not at levels that would predict a recession.

Finance Minister Michael Cullen said the descent into negative territory of the own activity indicator, while cause for concern, was hardly surprising.

However it was "far too early" to be talking about a hard landing or recession.

"Business profits are at historic highs and, even if growth in profits slows, should still be at levels to support employment and investment over the coming year, while continuing high labour market participation rates will support household incomes," he said.

"I think we are still looking at a fairly gentle correction compared with previous economic cycles."