Snapshot of confidence tells only half the story

The May survey was taken too early to catch the mood following the Budget. Photo / Herald Graphic

Business confidence remained high in the National Bank's May survey.

Its close-off date of May 14 means it does not capture reaction to the Budget or the market perturbations of the past fortnight.

But it indicates that business went into that period with confidence still at the elevated levels it has been at for the past nine months.

A net 48 per cent of firms expect the general economic situation to improve over the year ahead, down fractionally from a net 50 per cent in April. All sectors apart from manufacturing slipped.

But businesses' views of their own prospects continue to improve. A net 45 per cent expect their own activity to rise, the highest reading for 11 years and up from 43 per cent in April.

Employment intentions have strengthened, with a net 16 per cent expecting to increase staff numbers, up from 13 per cent in April.

"Investment intentions rose 4 points to 14 per cent positive, which is now above the historical average level and suggests we are on track for positive business investment growth," National Bank senior economist Khoon Goh said.

While the rebound in exports is helping the rebalancing of the economy, subdued imports of capital goods raise questions about the supply side of the economy.

And bank lending to business continues to shrink - implying, Goh said, reduced willingness by firms to borrow to invest.

"There are timing lags between confidence, imports and investment but now is about the time we need to see more concrete evidence of an increased willingness to invest."

There was anecdotal evidence that this was occurring, he said, but very, very slowly.

Profit expectations were the only activity gauge to decline in the latest survey, falling 2 points to a net 24 per cent positive.

"But this is still at a healthy level which, if translated into actual profits, should see firms act on their investment and hiring intentions," Goh said.

In the case of hiring it was already showing up in the hard data, he said, pointing to the most recent household labour force survey which recorded a seasonally adjusted increase in employment of 1 per cent, or 22,000 people, over the first three months of the year.

While the survey's growth indicators are positive, its inflation indicators are another story.

Inflation expectations were unchanged at 2.7 per cent.

"But they will surely rise once respondents start to factor in the GST increase announced at the Budget," he said.

Pricing intentions rose to a net 28 per cent now expecting to push prices higher, from 26 per cent in April.

"This is a level which is consistent with around 3 per cent annual headline inflation, and this is before accounting for the GST changes."

Goh said the past month had seen increasing unease about sovereign debt in Europe and an associated sell-off in sharemarkets. The exchange rate had tumbled, but so had world prices for hard commodities and it remained to be seen whether New Zealand's export commodities would follow suit.

But on the domestic front the Budget had been well received, Goh said.