Confidence dives to a 17-year low

Business confidence has dived to a 17-year low as firms are spooked by the Reserve Bank's threats of higher interest rates and Government controls on lending.

The ANZ National Bank's November business outlook survey shows a net 66 per cent of firms now expect generally tougher times over the next year. That's a big fall from a net 55 per cent pessimists last month and is the lowest reading since 1988, when the economy was still bedridden from the previous year's sharemarket crash.

Moreover, the survey's key "own activity" measure of firms' expectations for their individual prospects over the next 12 months indicates economic growth may be on the verge of stalling.

ANZ chief economist John McDermott said the own activity measure had proved to be a good predictor of economic activity over the survey's 22-year history.

This month, it deteriorated from a net 11.6 per cent of optimists in October to a five-year low of zero - with optimists and pessimists evenly balanced. "It's disconcerting. That's roughly consistent with the economy virtually stalling."

The fall was all the more strange as "this is an economy that mid-year was still on fire".

While yesterday's numbers could be a forewarning of a negative out-turn in GDP over the next few months, McDermott urged caution. "We'd have to see the numbers sit around here for a few months to be sure."

He believed firms may be overly pessimistic. A potential slowdown had been on the horizon for some time and "people are starting to believe the economy is in a meltdown. It is not.

"The danger is if the business sector really does lose confidence, these things have a habit of becoming self-fulfilling."

McDermott said it was hard to pin down exactly why firms were so gloomy, "but I'm suspecting that the speeches by the Governor of the Reserve Bank about some of the imbalances and the dangers we're facing and some of the more unusual suggestions by the Minister of Finance have definitely got their attention".

Earlier this month, the Reserve Bank and Treasury said they would assess tools to control inflation in addition to the official cash rate including regulation of lending by commercial banks.

But McDermott said talk of bringing back regulatory controls risked spreading uncertainty among businesses.

"The danger is they simply put their cheque books away, they stop investing in capital, they stop hiring people and we could get to a point where we have a very good and very resilient economy that just stops."

Meanwhile, yesterday's survey showed that firms' already high expectations of further interest rate hikes rose again during the month.

Finance Minister Michael Cullen said yesterday the decline in overall business confidence levels was unsurprising "given their historic sensitivity to trends in interest rates".

In his briefing to the incoming Government yesterday, Governor Alan Bollard again voiced his concerns about persistent domestic demand and consequent economic imbalances.

Down, down, down

* Business confidence has fallen sharply and a net 66 per cent of firms expect conditions to deteriorate.

* ANZ National Bank says businesses fear higher interest rates and Government controls on lending.

* The key "own activity" measure has flat-lined, indicating economic growth may be on the verge of stalling.