Smiles gaining on the gloom

By BRIAN FALLOW economics editor

Business confidence kept improving this month, although pessimists still slightly outnumber optimists, the National Bank's survey shows.

Firms' expectations of their own activity - as distinct from the general business situation - are at levels which suggest the economy has bounced back from the soft spot of weak growth in the June quarter and is running at about its long-run trend pace, the bank's chief economist, Dr John McDermott, said.

A net 3 per cent of respondents expect general business conditions to worsen in the coming year.

Last month it was a net 10 per cent, and in May 44 per cent.

Retailers and service industry firms are more optimistic than manufacturers or building firms, and agriculture is downright gloomy.

McDermott said the mid-year pessimism reflected a precarious international outlook, concerns about the Sars outbreak and looming electricity shortages.

Those clouds had dissipated, and economic forecasters and financial markets were now taking a more optimistic view of world growth, supported by recent data from the United States and Asia.

But their recovery tended to be patchy, and markets were still sensitive to bad news, McDermott said.

Firms' expectations of their own activity in the year ahead have also continued to rise, and a net 30 per cent now expect improvement.

That indicator is at levels suggesting the economy grew about 0.8 per cent in the September quarter, up from the 0.2 per cent recorded in the June quarter and consistent with its trend growth rate of about 3 per cent.

Export expectations are lower, but more firms than last month are expecting increased profits and selling prices.

"Hiring intentions have dropped marginally, but investment intentions are pretty much the same," McDermott said.

"The resilience of the domestic economy stems from a lengthy period of relatively low interest rates, strong net inward migration and a tight labour market providing job security."

Retailers are the most optimistic, followed by service firms, where optimists outnumber pessimists for the first time since November last year.

Construction had the highest level of profit expectations and hiring intentions of any sector.

The survey found a sharp turnaround in interest rate expectations. A net 14 per cent of firms now expect rates to rise. Last month a net 26 per cent expected further falls.

"Most economists' forecasts, including those from the Reserve Bank, suggest [a rise] is not a foregone conclusion," McDermott said.

"However, financial market pricing suggests interest rates could be increased as early as next March."

Positive vibes return

Auckland business confidence has bounced back almost to the levels of a year ago.

Auckland Chamber of Commerce's quarterly survey of its members, conducted last week, found that business people are starting to swing to the positive again.

A net 3 per cent (optimists minus pessimists) now think business conditions will improve over the next six months.

That is a marked change from the surveys in March and June when a net 17 per cent and 22 per cent thought things would get worse.

The 600 businesses which took part in the survey are even more optimistic when it comes to their own operations. A net 41 per cent now expect to do better over the next six months.

Both those figures are approaching the levels of optimism seen a year ago (a net 7 per cent positive), although they are still well below the giddy heights of March last year (a net 32 per cent positive).

Chamber chief executive Michael Barnett said the survey showed that Auckland had bounced back from the uncertainty which developed in the middle of the year.

But many firms were still having trouble hiring the right staff, skilled or unskilled. Manufacturing, hospitality and tourism businesses were the worst affected.