Survey reveals 'ugly' fall in confidence

Business confidence has plummeted to near 20-year lows in the Institute of Economic Research's latest quarterly survey of business opinion, indicating an export-led economic slowdown is well under way.

Of the December survey's 524 respondents, 65 per cent expect the general business situation to get worse over the next six months while only 4 per cent expect it to get better. The net 61 per cent pessimistic compares with a net 32 per cent in September and is the weakest reading since March 1986.

When adjusted for the normal summer lift in confidence it is the weakest business sentiment has been for 35 years.

The survey confirms the results of the less-detailed monthly survey run by the National Bank, which found a net 62 per cent of firms negative last month.

"It's downright ugly," said Westpac chief economist Brendan O'Donovan. "You just wonder when the Reserve Bank will wake up and realise the toast is burning."

Instead of focusing on the buoyant housing market, the central bank needed to look at the wider economy where it was clear it had been all too successful in reining in demand, O'Donovan said.

Confidence declined in all sectors, the institute said, but is weakest among manufacturers, whose competitiveness in both export and domestic markets has been hit by the high dollar. Manufacturers' export expectations fell to a 17-year low.

A net 5 per cent of firms reported a decline in their own trading activity in the past three months, the weakest since the Asian crisis. Expectations about the next three months are the weakest for eight years.

Cost pressures remain widespread with a net 41 per cent reporting increased costs, down from 49 per cent in September but well above the 10-year average of 21 per cent.

Some have responded by raising their own prices - a net 23 per cent, up from 19 per cent in September - and even more (32 per cent) intend to over the next three months.

But the institute said the increase in pricing intentions was concentrated in the services sector, where the main cost was wages, which tended to follow rises and falls in the economy with a one to two-year lag. The Reserve Bank might take some comfort from that.

The labour market looked a little shaky, institute director Brent Layton said.

Firms still report difficulty in finding both skilled and unskilled labour - but less so than any time in the past 2 1/2 years.

"Firms may continue to hire to make up for labour shortages over the past two years," Layton said. "If so it will help smooth the slowdown and ease the impact on households."

However the drop in hiring intentions in the latest survey could be an early sign of firms responding to the slowdown by shedding workers, despite the risk of not being able to find them when they needed them again.

As in the previous three surveys, firms reported a little more spare capacity in terms of plant and machinery.

Investment intentions have fallen sharply. A net 15 per cent of firms intend to invest less in plant and machinery compared with a net 3 per cent in September saying they expected to invest more.

First New Zealand capital economist Jason Wong said levels of business investment, as reported in the gross domestic product data, have been running at historically high levels and growing at double-digit rates.

"If businesses are really this pessimistic, why are they strongly increasing investment? What they say and what they do is a bit different at times."

Although Wong believes the survey overstates how badly the economy is doing at the moment, it showed the economy was growing at a below-trend rate and would continue to slow, to 1.5 per cent some time this year or perhaps even lower.

But O'Donovan sees the survey as unambiguous evidence that the Reserve Bank has tightened monetary conditions too much.

"It's not just New Zealand demand that matters, it's world demand for our products. And with the dollar at these levels we are just not competitive."

The Reserve Bank would be hoping the easing would come through the exchange rate, O'Donovan said. But with Asian demand for New Zealand interest rates so high, that might prove a vain hope.

"Eventually if the dollar doesn't fall of its own accord the Reserve Bank will have to step up and start the easing by cutting lower interest rates."