KEY POINTS:
Business confidence has plunged in the latest National Bank survey, weighed down by high interest rates and an export-withering exchange rate.
But the bank's chief economist, Cameron Bagrie, warned that steep though the decline is, it might not be enough to avert another interest rate increase from Reserve Bank Governor Alan Bollard next week.
Although 57 per cent of respondents expect business conditions to worsen over the coming year, only 9 per cent expect them to get better.
The net 48 per cent who are pessimistic is down from a net 19 per cent last month and takes confidence to the lowest level since early last year. The decline was across all sectors.
Firms' views of their own prospects have fallen steeply as well. A net 8 per cent expect their own activity to increase over the year ahead compared with 23 per cent last month.
Their profit expectations and investment and hiring intentions have all weakened.
Bagrie said interest rates and the currency were high, petrol prices rising and job losses emerging. "History shows the economy does tend to turn in response to such conditions."
The weakness in business confidence, as a barometer of spending, investing and hiring decisions, pointed to the moderation in growth that the Reserve Bank was looking for, he said.
The money market reacted to the news by pricing in less chance of an OCR rise to 8 per cent next week, from a 34 per cent probability before the confidence figures were released to 27 per cent after, according to Credit Suisse's swaps-based indicator.
But Bagrie said it might not be enough to avert another rate increase.
"The Reserve Bank will get its slowdown. The issue is whether it will be sustained. The risk is they will slip in another one [OCR rise] just to make absolutely sure."
The fall in business confidence pointed to weaker growth over the next six months or so, he said, but looking further out - as the Reserve Bank had to - there were the effects of a bumper dairy payout and a more stimulatory fiscal policy than expected.
Firms' own-activity expectations were just as weak last August, Bagrie said, but the economy shrugged it off.
But two things are different this time. One is the steepness of the decline, with expectations deteriorating by 15 percentage points, the sixth steepest decline since the survey began in 1988. The other is the parlous state of the export sector.
Export intentions are the weakest they have been since 1998 and among manufacturers, the weakest in the survey's 19-year history.
"They're not happy," Bagrie said. "It's not just the currency. It's regulation and weak productivity growth. No wonder you hear talk of relocation and job losses."
UBS economist Robin Clements said the reduced employment intentions should ensure the labour market softened and unemployment rose, taking the pressure off wages.
"This should contribute to subduing consumer confidence, which is already deteriorating, taming the appetite for credit, spending and housing," Clements said.
He pointed to a turnaround in construction firms' expectations for residential building, from a net 21 per cent expecting an increase in the April survey, to a net 16 per cent expecting a decline this time.
"Is this enough to prevent the Reserve Bank from hiking again on June 7? We would have thought so. It suggests the rate hikes, along with the high currency, are biting. All the more reason to wait and see."
Gloomy Outlook
* Overall confidence plummets to a net 48 per cent pessimistic.
* Firms' own-activity outlook is the weakest since last August.
* A net 29 per cent of firms expect to raise their prices - almost as many as a month ago.
