Positive signs economy on the up

ANZ National chief economist Cameron Bagrie. Photo / Mark Mitchell

A surge in business confidence shows the economy has turned a corner and is on its way out of recession, says ANZ National Bank chief economist Cameron Bagrie.

The bank yesterday revealed a major boost in its monthly business survey with a net 34 per cent of firms believing general business conditions were picking up - a leap from the net 16 per cent in July.

"The big message is we have got an economy that has turned the corner."

While optimism in residential construction was particularly strong with a net 47.6 per cent feeling positive, Bagrie said all sectors were showing signs of recovery.

"Housing is at the forefront of the recovery and being a key part of the New Zealand psyche it has a ripple effect."

Agriculture was the only sector to remain negative with a net 9 per cent expecting general conditions to worsen.

Businesses were also upbeat about their own activities - a measure seen as being a more reliable indicator. A net 26 per cent were positive about the future, up from a net 13 per cent last month.

The figure is close to being a five year high although the long-term historical average for the indicator is a net 25 per cent positive.

Bagrie said that indicated potential GDP growth of 3 per cent over the next year although a composite index showed it was likely to be closer to 1.5 to 2 per cent.

Profit expectations also returned to the black with a net 1 per cent expecting to make a real profit. But job losses remained on the radar with a net 2.6 per cent of businesses looking to shed employees - an improvement from the net 7 per cent in July and the net 17 per cent in June.

Bagrie said it showed the number of people losing their jobs was slowing. He expected job cuts to continue until the end of the year but said there should be some stabilisation by the start of next year. However, that would not necessarily mean unemployment levels would improve as many firms had the capacity to work people harder rather than hiring new staff.

The commercial construction sector was the only area where confidence had dropped in the past month.

Bagrie said this sector tended to lag the economic cycle and was usually the last area to come back up when the economy began recovering.

But questions remain over whether the recovery is sustainable.

Bagrie said the housing market was responding as it should to the low interest rate environment. But an overly excited housing-led recovery where people began borrowing more to consume was not likely to lead to a strong recovery.

He said signs of a full recovery should include a significant reduction in the current account deficit, an increase in household savings and a switch from importing to greater levels of exporting. "And we haven't seen a sufficient improvements there yet."

Bagrie said New Zealand, like other countries, needed to go through a process of change but that would take time.

"Things are going to look patchy. It's time for people to get their heads around the fact that it's not going back to the way things were."

ASB economist Jane Turner said the survey pointed to a growing economy in either the third or fourth quarter of this year reinforcing the belief that the recession was over.

However, Turner said some of the confidence may incorporate a bit of a "phew factor".

"There will still be challenges for export sectors over the next year given the extent of economic pain being felt elsewhere."