Pessimists exceed optimists

By BRIAN FALLOW

After a couple of tentative declines, business sentiment made up its mind and plunged into negative territory this month.

A National Bank survey has found a net 7 per cent of firms expecting the general business situation to worsen over the next 12 months, compared with a net 7 per cent last month still expecting it to improve.

Apart from a brief dip after September 11, it is the first time pessimists have outnumbered optimists since the winter of discontent in 2000.

National Bank chief economist John McDermott puts the decline in confidence down to fears about how high interest rates, and even more the exchange rate, will go.

The decline in confidence has spread from the general business environment to what respondents are saying about their own businesses.

Expectations about firms' own activity, profits and export prospects have all declined. Though investment intentions have held steady, hiring intentions are off slightly.

Perhaps more important, McDermott said, the proportion of firms intending to raise their prices had fallen markedly over the past three months.

Over the past few years responses to this question have proved a good indicator of inflation trends.

"With an appreciating New Zealand dollar lowering import costs, margins that were squeezed over the last couple of years can be rebuilt without the need to resort to increasing retail prices."

The Reserve Bank, which in its May statement fretted that inflation expectations might be slipping, should take comfort, he said.

Agriculture is the most pessimistic sector, where a net 50 per cent of respondents expect conditions to worsen over the next 12 months.

While the forecast payout for dairy farmers for the new season is down about 25 per cent on the bumper 2001-02 season, in inflation- adjusted terms it is only just below the 10-year average.

The reasons for the decline in business confidence, especially concerns about the exchange rate, also suggest that the unexpectedly good current account figures released yesterday are close to as good as it gets.

The $2.7 billion deficit for the March year is equivalent to 2.2 per cent of gross domestic product, a sharp improvement from 4.7 per cent in the March 2001 year and 6.7 per cent the year before that.

It now takes 5 1/2 weeks' worth of exports to cover the interest on New Zealand's overseas debt, compared with 9 1/2 weeks four years ago.

The $732 million surplus for the March quarter was a lot better than the $225 million deficit economists had expected.

The main reasons, said WestpacTrust economist Nick Tuffley, were a sharp rebound in inbound tourism, improved earnings from overseas investment, especially in Australia, and a smaller outflow from foreign investment here, reflecting lower levels of New Zealand corporate debt and lower interest rates.

McDermott said the recent rise in the exchange rate would take its toll, first on the tourism and travel balance, and then trade, but only after a lag.

"We expect the current account deficit to be back at 4 per cent of GDP within 12 months."

But it may be some time before that takes pressure off the exchange rate.

Tuffley said New Zealand's current account deficit compared favourably with that of the United States and provided a Macro-economic reason for the kiwi dollar's rise against the greenback.

"At 4.3 per cent [of GDP] people are already getting concerned about the size of the US deficit and it is expected to widen even further from that level. Currency depreciation is is one of the usual ways for large deficits to narrow - witness New Zealand since 1997 - and that is starting to prey on investors' minds."