Lower dollar brings jump in confidence

Business confidence has rebounded sharply in the National Bank's latest survey, with the lower dollar providing the most likely trampoline.

A net 32 per cent of firms still expect general business conditions to get worse over the next six months but that is down from last month's net 51 per cent expecting worse times.

The improvement in general sentiment was mirrored in firms' views of their own activity, a more reliable indicator of the economy's short-term outlook. A net 15 per cent of firms expect to be busier, up from a net 5 per cent last month.

The improvement was widespread across retailers, manufacturers, builders and firms in the agriculture and service sectors.

Profit expectations and hiring intentions improved, but investment intentions went sideways.

National Bank chief economist Cameron Bagrie said: "We need look no further than the weaker currency as the elixir."

Export intentions have risen to a four-year high. When they were last at these levels, the dollar was below US50c. But this time the global economy is stronger, commodity prices are higher and corporate cashflows and balance sheets are in better shape, giving companies scope to invest in anticipation of improved revenues.

But Bagrie said the lift in sentiment might be regarded as modest, given the extent and speed of the dollar's fall.

"This implies there are deeper forces at work that will continue to curtail economic performance."

He said that although financial conditions had eased somewhat, there were still reasons for businesses and consumers to be cautious.

Firms' margins were under pressure, and just when the currency was starting to provide support to the export sector, renewed yield-related interest in the dollar was threatening to take it all away.

A perilously low household savings rate implied that a period of consolidation by households was around the corner, particularly with incomes squeezed by higher petrol prices.

In real terms, petrol prices are now only 15 per cent below levels last seen during the second oil shock of the late 1970s and early 1980s.

It presented central banks with a dilemma: Whether to give more weight to the dampening effect on growth or the upward pressure on inflation.

A one-off change in relative prices was something the Reserve Bank could and should ignore but not if it undermined confidence in low inflation and revived a cost-plus mentality.

The survey found inflation expectations unchanged at 3.07 per cent.

But Bagrie said the latest round of petrol price increases, which would be reflected in the next survey, could produce a mild uptick in inflation expectations.

The proportion of firms planning to increase their prices jumped from a net 24 per cent in March to 36 per cent, the highest level since late 2000 when inflation spiked to 4 per cent.

A big part of the jump in pricing intentions was a turnaround in the agriculture sector from a net 13 per cent expecting lower prices last month to 26 per cent expecting better ones this time.

Bagrie said that was likely to reflect the dollar's decline, rather than cost-push factors. But the other sectors also recorded significant rises in pricing intentions.

"It's a clear warning shot," he said.

Until the Reserve Bank believed those risks had dissipated, monetary policy would remain restrictive and it would continue to say cuts in the official cash rate were off the agenda.