Silver linings among Economy clouds

By BRIAN FALLOW

General business confidence ebbed this month, although firms remain more optimistic about their own prospects.

The National Bank's survey found 28 per cent of respondents expected general business conditions to improve over the year ahead and 21 per cent thought they would deteriorate.

The net 7 per cent positive reading is down from 14 per cent last month and 20 per cent in March.

National Bank chief economist Dr John McDermott said that, while general confidence was well below its long-run average, firms' expectations about their own activity (a net 39 per cent positive) were steady and well above their long-run average.

Own activity tended to be a better indicator, McDermott said. It was less subjective and tended to reflect such things as the state of firms' order books.

"Profit expectations, export expectations and capacity utilisation are all at their long-run level," he said.

Investment and hiring intentions, though they had softened slightly since last month, were marginally above their long-run average.

But if the picture was of an economy that was pretty much in balance, there were emerging influences that threatened to throw it out of kilter, McDermott said.

The New Zealand dollar had appreciated rapidly, the United States recovery, while continuing, had slowed and rising interest rates would start to bite in, for example, the housing market.

The survey has mixed signals in the inflation front. Inflation expectations have crept higher for the second month in a row and at 2.87 per cent are closing in on the top of the Reserve Bank's target range.

But the proportion of firms expecting to raise their own prices over the next three months has fallen in all sectors except construction.

The rise in inflation expectations would ring some alarm bells at the Reserve Bank, McDermott said.

"In the last monetary policy statement they noted that inflation itself is stickier, not coming down as fast as they hoped, and they were worried about expectations."

Pricing intentions, on the other hand, were a better indicator of short-term price pressure, which was dropping on the back of an appreciating currency.

The stronger dollar allowed firms to rebuild margins without raising their prices.

The sectors whose general sentiment had weakened most since the peak in March were agriculture and construction. McDermott said since both were weather-affected it might be a case of pre-winter blues.