Surge in confidence comes with warning

Economists say that improved business confidence is no guarantee of a sustained recovery. Photo / Hawkes Bay Today

Business confidence has soared in the New Zealand Institute of Economic Research's September survey but economists warn it is not necessarily the harbinger of a swift, strong and sustained recovery.

A net 36 per cent of the 890 respondent firms expect the general business situation to improve over the next six months - the highest level for 10 years - when a net 25 per cent in the June survey expected it to get worse. Even when seasonally adjusted the turnaround is dramatic, from a net 14 pessimistic to a net 27 per cent optimistic.

It is consistent with the resurgence in equity, housing and commodity markets as well as other surveys of business and consumer sentiment.

Firms are also more upbeat about their own activity. A net 21 per cent report that their activity declined in the past three months, an improvement from a net 38 per cent going backwards in the June quarter. But that is still weak by historical standards. The long-run average is for a net 12 per cent of firms to report increased activity.

The big contrast is between what firms report about the last three months and what they say they expect of the next three.

Expectations foreshadow a swift turnaround from a net 21 per cent going backwards in the September quarter to a net 21 per cent forging ahead in the December quarter.

NZIER principal economist Shamubeel Eaqub cautions that the gap between experienced and expected conditions has never been so wide in the 40-year history of the survey.

Firms' expectations of their own activity have generally been a reliable guide to future growth in gross domestic product, and taken at face value the latest results point to growth between 3 and 4 per cent over the year ahead, he said.

But there had been false signals around past turning points and he was cautious about interpreting the extent of the current optimism.

Eaqub also pointed to signs in the survey that firms are not yet putting their money where their mouths are in terms of hiring, investment or retailers restocking.

"We shouldn't get too carried away. Sales remain weak and until firms see these picking up again they are unlikely to take on many more staff or invest heavily. This suggests the recovery will be shallow and gradual."

While a net 29 per cent reported reduced staff numbers over the past three months - similar to the two preceding quarters - no net change is expected in the three months ahead. And the ease with which they can find labour remains high by historical standards.

"That implies wages growth will remain subdued for the next two years," Eaqub said.

The picture of a weak but improving labour market is consistent with what the Treasury reported on Monday from talks officials had with businesses last month.

The reduction in staff numbers appeared to be coming to an end, it said. Employers had reported labour hoarding, especially of skilled people, and expected to resume or increase hiring next year.

NZIER's quarterly survey of business opinion found intentions to invest in plant and machinery still in negative territory, though less so than in previous quarters.

Firms reported rising costs but falling selling prices resulting in a net 39 per cent with worsening profitability. But only a net 3 per cent expected a further decline in the December quarter.

ANZ National Bank economist Philip Borkin said that time and again confidence surveys had proven to be accurate barometers.

"However it remains to be seen how much of the improvement in confidence merely reflects the fact that the economy is looking up from a deep hole."

The disparity between current and expected conditions, also evident in consumer confidence surveys, was stark and carried with it the potential for disappointment, Borkin said.

Bank of New Zealand economist Stephen Toplis said: "Given where we have come from it is not surprising people feel better. Most of us are forecasting a reasonably robust expansion next year. The real question is what happens after that."

ASB chief economist Nick Tuffley said: "Although activity is recovering, the survey indicates the reserve bank continues to face an outlook with risks of inflation below the target band. As long as the inflation outlook remains benign it will be in no hurry to lift the official cash rate."