Recession now 'normal', as confidence improves

A rebound in business confidence to much less negative levels is seen as indicating New Zealand is now in a "normal" recession, rather than something much worse.

The Quarterly Survey of Business Opinion (QSBO) for the June quarter, published today by the New Zealand Institute of Economic Research (NZIER), found a net balance of 25 per cent of firms expected the general business situation to deteriorate.

That was an improvement from 65 per cent in the previous quarter. Seasonally adjusted, 16 per cent expected deterioration in the latest quarter, from 55 per cent.

Firms' own experience was more informative, with domestic trading activity indicators showing activity still particularly weak in the latest three months, but expectations had significantly improved, NZIER said.

Seasonally adjusted, the net balance of firms reporting a decrease in their own trading activity in the June quarter was 36 per cent, down from 45 per cent in the previous survey, which had been the highest percentage reporting a decrease since at least March 1970.

For the next quarter, a net 10 per cent of firms reported they expected their own trading activity to fall in the next three months, compared with a net 36 per cent expecting a decline in the previous survey.

Commenting on the survey, ANZ bank said all the key variables remained negative and well below historical averages.

The biggest recovery in confidence was in the building industry, followed by merchants. That reflected a classic Fifo (first in first out) pattern, given those two sectors felt the impact of the global downturn earlier and, so far, harder.

In contrast the services sector, after faring relatively better during the downturn, recorded the lowest confidence and expected domestic trading activity reading of all the sectors.

That suggested the sector was going through a Lilo (last in last out) phase, ANZ said.

"If there is one key message from today's QSBO, it is that we are back to facing a `normal' recession as opposed to something far more damaging."

The improvement in the expected domestic trading activity reading to a net -10 per cent from a net -36 per cent, suggested the 1 per cent declines in gross domestic product in the December and March quarters would be the worst for this cycle, ANZ said.

More modest contractions were in store for the second and third quarters.

"At the rate that the recent dataflow has been improving, we could well see the official end to this recession in Q4."

But the details suggested caution over the recovery path, with businesses still doing it tough, ANZ said.

Profit expectations remained negative, though less so, and a lack of sales remained the key factor constraining output.

Alarmingly, firms continued to report poor productivity performance in the latest quarter, despite many already having taken steps to restructure through lowering staffing levels, ANZ said.

"Strong productivity is essential in driving a sustained recovery, and this looks to be sorely missing at present."

The QSBO data points to further rises in unemployment, with NZIER predicting the unemployment rate to reach 7.8 per cent next year.

In the latest quarter, a net 31 per cent of firms cut employee numbers, while a net 19 per cent intended to cut staff numbers in the next three months, compared to 36 per cent who intended to cut in the previous survey.

ANZ said the labour market continued to have considerable slack.

The employment intentions reading pointed to further rises in the unemployment rate during the next few quarters.

Each year 40,000 to 50,000 jobs needed to be created just to absorb new entrants into the labour market and therefore keep the unemployment rate unchanged.

Extra questions in the June survey looking at the impact of credit conditions on business found access to credit did not seem to be playing a major role in firms' business.

While ongoing access to finance was a concern, and firms reported a tightening of terms and conditions and fees, it was weak demand - sales - that was the biggest barrier to firms increasing output, NZIER said.

- NZPA