Tourism buffets business outlook

By BRIAN FALLOW economics editor

New Zealand business confidence plummeted in the aftermath of the terrorist attacks on the United States, but economists say it would be premature to conclude the economy will nosedive as well.

The New Zealand Institute of Economic Research's quarterly survey of business opinion, taken days after the attacks on September 11, recorded a steep drop in sentiment about the outlook for the economy, but a more modest weakening in expectations about respondents' own prospects.

Of the 681 firms that responded, 54 per cent expect the general business situation to worsen, while 10 per cent expect it to improve.

The net pessimism reading of 44 per cent is similar to levels in the middle of last year, when business was fretting about labour law and ACC changes, and is not far above the lows reached after the Asian crisis and the Gulf war.

But in those three previous occasions confidence rebounded just as quickly, UBS Warburg chief economist Robin Clements said.

Respondent firms' views of their own outlook have taken a turn for the worse, but not nearly as much as their view of the economy as a whole.

Manufacturers, retailers and builders still expect trading activity to grow in the next three months. Only the service sector, which includes tourism, expects a fall.

Overall expectations for domestic trading activity have eased from a net 25 per cent positive three months ago to a net 11 per cent - consistent with economists' forecasts of a slowdown in growth, to around 2 per cent next year, but not a recession.

Hiring intentions have softened compared with three months ago, but remain in positive territory, with more firms expecting to increase staff numbers than reduce them.

Firms reported both skilled and unskilled workers were slightly easier to find compared with the June quarter, though the labour market remained tight.

Investment intentions have also weakened. NZIER said the uncertainty about the world economy which had shaken business confidence, if prolonged, would lead to a slowdown in business investment. Investment was also being hit by the weakness of the New Zealand dollar, which puts up the cost of imported plant and Machinery.

Manufacturers' expectations of increasing export sales have fallen sharply, although some growth is still expected.

"Household spending remains the key for the next two or three quarters," said NZIER economist Doug Steel.

The institute pointed to indicators in the survey which showed the economy had entered the crisis with a fair head of steam. All sectors reported an increase in activity in the September quarter, albeit down from June.

Increases in selling prices became more widespread in the September quarter, and expectations of higher costs have caused intentions to raise prices in the next three months to become more widespread still.

Mr Steel said there were mixed messages for the Reserve Bank. On the one hand sentiment was very pessimistic, while on the other activity was reasonably robust and there was inflationary pressure.

Deutsche Bank economist Darren Gibbs said the confidence figures increased the likelihood the Reserve Bank would cut the official cash rate 25 basis points to 5 per cent at its November 14 monetary policy statement.

And because it would then not be reviewing rates until January 24 there was a fair chance - perhaps 35 per cent probability - that the bank would cut by 50 basis points next month, Mr Gibbs said. Such precautionary easings could be reversed quickly if need be with no loss of face.

NZIER economist Phil Briggs said that while the institute expects the global slowdown to be sharper than was expected before September 11, it may also be shorter because of the huge further monetary and fiscal stimulus they have triggered. US interest rates are the lowest they have been for nearly 40 years.

* Rabobank says farmer confidence has fallen with barely a quarter of farmers - the lowest number in two years - expecting their industry to perform better in the coming year.

Thirteen per cent of a nationwide, poll of a thousand farmers expected industry performance to worsen.

The AC Nielsen/Rabobank Rural Confidence Survey was taken in August, before the terrorism in the US.